15 Interviews 2016

Fortnightly Thoughts
July 28, 2016
Special Issue
15 interviews to read this summer

We have dug around in our archives again to bring you fifteen of the best interviews we have
conducted in our 108 issues. They cover a huge breadth of topics from artificial intelligence
and income inequality to abundance and scarcity, and from consumer behaviour and
demographics to productivity and the role of GDP. Our interviewees are both eminent and
prominent in their fields, which is why we recommend tucking this special issue under your
arm or slipping it into your suitcase.
WORDS OF WISDOM FROM
Investing in the new, new world
Michael Porter, of Harvard, on competitive advantages in a smart, connected world
Aswath Damodaran, of NYU, on valuing disruption
Edward Chancellor, author of Devil Take the Hindmost, on capital investment cycles
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The evolution of innovation

Erik Brynjolfsson, of MIT, on automation and the future of jobs
Rodney Brooks, Founder of Rethink Robotics, on artificial intelligence and collaborative robots
Peter Diamandis, Co-author of Abundance: The Future Is Better Than You Think
Vic Abate, CTO of General Electric, on the necessary conditions for innovation
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The changing shape of economics

Greg Mankiw, of Harvard, on globalisation and income inequality
Branko Milanovi, author of Global Inequality: A New Approach for the Age of Globalization
Diane Coyle, author of GDP: A Brief but Affectionate History on the role, importance and future of GDP
Sir Partha Dasgupta, of Cambridge University, on falling fertility rates
Understanding the behavioural revolution
Dan Ariely, of Duke University, on irrational and rational consumer decision making
Robert Cialdini, author of Influence: The Psychology of Persuasion, on how consumers spend
Benedict Evans, Partner at Andreessen Horowitz, on the power of convenience
Rory Sutherland, of Ogilvy Group, on selling to young consumers
Hugo Scott-Gall
hugo.scott-gall@gs.com
+1 (212) 902 0159
Goldman, Sachs & Co.
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Sumana Manohar, CFA

sumana.manohar@gs.com
+44 (20) 7051 9677
Goldman Sachs International
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Special Issue
Interview withMichael Porter

About Michael Porter
Michael Porter is the Bishop William Lawrence University Professor at The Insititute for Strategy and Competitiveness, Harvard Business
School. He has brought economic theory and strategy concepts to bear on many of the most challenging problems facing corporations,
economies and societies, including market competition and company strategy, economic development, the environment, and health care.
His extensive research is widely recognized in governments, corporations, NGOs, and academic circles around the globe. He is the most
cited scholar today in economics and business.
How is IT changing the nature of products as they become smart and connected?
What were witnessing is a very broad-based transformation of what we mean by a product; how its composed
and clearly what it can do. Over the long run, this IT wave should affect a great majority of products in the
economy and the impact is already evident in some areas. Complex equipment and machines like jet engines,
airplanes, generators etc. are changing in the B2B space, while IT has also penetrated the consumer domain
where everything from thermostats to tennis racquets are increasingly smart and connected. The shift in the
nature of products is also changing the nature of competition in industries that utilize those products.
Of course, we are still in the very early innings of this shift and even for companies that are very advanced in
this domain, only 10%-20% of product lines are currently connected; 80% of products are still the old kind and
it will take a lot of effort and a long time to build the new skills and organizational models required for the shift.
Will this mean that industry boundaries will change and be reshaped too...
Absolutely. The definition of the industry that a product serves is expanding. And this is because when we add
smartness and connectivity to conventional, previously non-connected products, we often find that the coordination and interaction of smart machines can actually boost the collective performance in totality. Take
farm tractors for example, which used to be a well-defined industry. Now, making the farm tractor smart in itself
requires a lot of disruption inside firms, in terms of how they make, design, market and service tractors. But it
is when we make the tractor both smart and connected, that suddenly other farm equipment and farm inputs
can be coordinated and integrated in a variety of ways. And this is when the products industry definition gets
blurred, and it moves from being part of the farm tractor industry to the smart farm industry. Tractor companies
thus face a tug of war between producing just one product (a conventional farm tractor) and risking losing out,
or broadening their scope and making the product interconnected to the wider system. Every player in the
industry would have to ask themselves if they can compete just as a farm tractor company anymore or if it is
imperative that they get into the irrigation, planter or tiller businesses.
Questions like these are becoming pertinent to companies across industries, be it an environmental system,
mobility system or home security and energy system; companies across domains need to think about
becoming part of integrated systems and the role that they can play in them.
This will create plenty of opportunities for product specialists going forward and we will see a war between old
and new players for setting the standard and gaining control of connected systems. This is what is happening
in the home energy space where utility companies, incumbents and new entrants such as Nest are vying for
dominance.
How is the current IT revolution different from previous IT-led improvements?
The previous generations of IT revolutions were primarily concerned with driving improvements in internal
efficiency and productivity. For example, via automating product design with CAD tools and improving supply
chains efficiencies through IT tools for supply chain/ customer relations management. But in the ongoing wave,
IT is becoming a more engrained part of the product itself and the impact of this is much more profound, not
just on the product but also on competition and industry definitions. And so, companies today continually need
to ask themselves what the boundaries of their industries are going to be and how will they compete in a world
where related products are interconnected?
What type of companies will enjoy genuine competitive advantages in the smart-connected world?
The sources of competitive advantages look very different in a purely digital world and a smart-connected one.
Let me explain with an example.
Because Google gathers a lot of information, its search is more profound and powerful versus competitors and
that contributes to a positive feedback loop, allowing the company to gather even more information and attract
even more people to search on its platform. And there are a lot of network externalities and natural monopoly
effects like this in a purely digital world. The smart-connected product world on the other hand is not just a
digital world, but an interplay of digital and mechanical worlds; a combination of physical products, software
and technology. And to be dominant in this world, a company will need to set the standard for the broader
system it operates in.
Creating well designed, world-class products which incorporate software and connectivity should matter more
than having a proprietary platform or information edge. And so, while Google has a natural monopoly on
information and search, and the company is increasingly getting stronger in mobile too, having a great
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smartphone platform that people use as an interface for dealing with smart-connected products isnt
necessarily a strong source of competitive advantage for Google. The company is deeply entrenched in the
smart device ecosystem via its products, but what it provides is essentially basic infrastructure. And providing
connectivity and infrastructure to support products in this manner is a commodity type offering.
Genuine competitive advantage doesnt stem from simple algorithms that coordinate between connected
products either. The advantage lies not with the data around the usage pattern of a product, but in the
analytics that determines for instance that a water meter is likely to fail over the next three months based on
the data pattern emerging from the water meters sensors. Or to go back to the farm tractor example, the real
value add lies in using data to dramatically improve the functionality of tractors and making engines more fuel
efficient etc.
The ability to design products that can get the best out of hardware and software and integrate those two in a
powerful way is a source of genuine competitive advantage. And this is because transforming the functionality
of products by using technology optimizes product usage and improves the companys services offering. What
companies like Google and Amazon have are great platforms, efficient infrastructure and product clouds. And
while this should help them gain market share in the near term, the actual applications, analytics and physical
products will remain more critical in the digital connected world over a longer period.
Finally, not all connected systems are similar in complexity. While there are many parts that need to be
connected in a smart city, most of the connections dont require material changes in the design of individual
products that are part of the system. And so, the value add primarily comes through the information flows and
data sharing between components like traffic lights and vehicles, which help in the identification of traffic flows
and congestion hot-spots. On the other hand, a lot of co-design is needed to make manufacturing smart and
connected and to ensure that the entire factory is optimized.
Theres really no one size fits all solution and it is thus unlikely that any one company will dominate the smartconnected product world.
Will connected systems lead to a utilization and productivity revolution?
They should and its much needed given how weak productivity improvements have been in the slow growth
mode weve been stuck in for the last 10-15 years. What we are witnessing now has more profound
implications than the previous IT revolutions, which really only changed internal processes in companies. The
third wave of IT is much bigger. Companies should not only get a productivity boost via internal efficiency
improvements in manufacturing processes, but the product itself should become better. Machines for example
can be more energy efficient, come with better up-time and utilization, require less operator time, can be
remotely controlled and have multiple features that make it easier for people to use them. In short, in the third
IT revolution we get a productivity boost in the value chain, in the products innate productivity and in the
productivity of the users of smart-connected products. And all of this should impact revenues by allowing
companies to provide better services. In a smart-connected airplane for example, a maintenance issue can be
identified as soon as it occurs and be fixed rapidly. And this can translate into substantial fuel, time and
monetary saving and have a positive impact on the efficiency of the entire airline operation.
How hard will it be for companies to move towards smart products?
For an established company, the fixed cost and barriers of moving towards smart-connected-products are
generally quite high. It requires a lot of heavy lifting and can be a huge challenge for incumbent manufacturing
firms. They have to deal with software companies, carry out analytics and establish databases. They also need
to rethink their entire service operation as remote servicing reduces the need for spare parts, a traditionally big
revenue stream for manufacturing companies. The barriers to entry in the smart, connected product domain
are also much higher than the barriers to entry in conventional product businesses. To compete meaningfully,
companies not only need to have a great functional product thats well designed, well-made and reliable, but
they also need to incorporate software, sensors, algorithms, and effective connectivity in the product. Plus,
they need to manage a product cloud that is state of the art, secure and reliable. Having said that, for a new,
fresh company that comes in with a clean sheet of paper and no legacy asset base, the barriers to entry are
often much lower.
Do you think that increasing consolidation across industries has reduced the incentives for
companies to spend on R&D? And is this part of the reason why corporate profits are high?
Absolutely. A number of things are keeping profits high. A lot of EPS improvement has come via share buybacks as investors demanded greater shareholder returns. Globalization also boosted profitability as leading
MNCs were able to grow in under-penetrated emerging markets and capitalise on oversees growth. And of
course, theres been a lot of M&A and consolidation. The extent of consolidation is actually quite worrying as
gigantic companies in top five positions globally are now merging with each other. This is a very important
moment and a lot of industries are becoming too concentrated.
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But there is hope for an investment revival. In order to transition to a smart and connected world, existing
manufacturers will have to invest significantly in cloud and IT infrastructure and in re-engineering their product
base. This is a very capital-intensive process and should boost capex and R&D. It can also fuel innovation and
entrepreneurship by creating enough discontinuity for new competitors to enter industries that were previously
deemed unassailable. Nest is a great example in this context. Until recently, it was hard to imagine a new
company competing with a dominant global leader like Honeywell, but suddenly, with a new way of thinking
about the product and its capabilities, a meaningful competitor has emerged in the form of Nest. Were starting
to see new entrants in other industries too which will hopefully put pressure on established players to speed up
their digital transformation which should create an up-tick in investment and drive innovation in the economy.
Which companies are investing in this opportunity?
GE is a great example. It has multi-billion-dollars of service backlog, and technology is allowing the company
to perform service much more efficiently across product lines, be it medical devices, locomotives, aircraft
engines or generators. It has invested c.US$1 bn in software and created a big operation in the Silicon Valley.
The pace of progress in a manufacturing company is of course not the same as the clock speed of a software
company, but, progress is being made. Companies like Caterpillar, Robert Bosch and Schneider Electric are
also heavily invested in this area while other manufacturing companies still lag in their understanding of the
shift towards digital-connected products.
Originally featured in issue 99 on thematic investing (Fortnightly Thoughts: What we think about when we think about themes, December
17, 2015)
Special Issue
Interview withDan Ariely

About Dan Ariely
Dan Ariely, the James B. Duke Professor of Psychology & Behavioral Economics at Duke University, is dedicated to answering these
questions and others in order to help people live more sensible if not rational lives. He is a founding member of the Center for
Advanced Hindsight, co-creator of the film documentary (Dis)Honesty: The Truth About Lies, and a three-time New York Times bestselling
author. His books include Predictably Irrational, The Upside of Irrationality, The Honest Truth About Dishonesty, and Irrationally Yours.
You argue that people are systematically irrational in the choices they make. Can you give a few
examples of business models that thrive on these inefficiencies?
Sadly, there are many. The biggest one is the gambling industry which is based on this interesting idea of
random reinforcements. The famous psychologist B.F. Skinner showed many years ago that if we give a rat a
fixed reward once every 100 times it presses a lever, the rat finds the exercise very interesting. But if we give it
a reward more randomly, with the frequency ranging from 1 to 200 lever presses, then, all of a sudden, the rat
is much more excited and persists in the activity for much longer. Of course, most of us know that the
expected value of gambling is negative i.e. players are expected to lose, but nevertheless, people continue to
be drawn to it, because of this concept of random reinforcement. So gambling is one example of a business
model built around behavioral inefficiencies.
Another example would be businesses supplying addictive substances; not just hard drugs, but also the likes
of nicotine, where people dont necessarily understand that they are getting addicted, leading them to exhibit
inefficient buying decisions. These are all examples on the extreme side of irrational behavior. There are also
some other interesting but less straightforward examples.
Take Kickstarter for instance. I am a big fan of the platform, but if you think about the people who contribute to
Kickstarter, you will find that some of them may be the same people who are willing to download a movie
illegally for free. So why are they willing to spend money in order to support something like a movie project on
Kickstarter, which, if it existed already, they might have watched for free? The reason is that in the Kickstarter
model, people feel that they are participating in the creation of something. So, if a movie hasnt been created
already, they are willing to spend money to participate in it, as they feel that it would make the competition of
that project more likely. Whereas if the movie has already been released, they assume that the fixed cost has
already been taken care of, and hence they dont need to contribute economically.
Another example is the name your own price model. A lot of businesses now have the mechanism wherein
consumers experience the product or the service, and are then asked how much they want to pay. There is no
real incentive for the customers to pay up, but they are often willing to pay some amount, even if it isnt as
much as the retail price the manufacturer would have wanted. Finally, think about businesses based around
reviews. Rationally, why would anybody ever leave reviews when it is clear that they are certainly going to
spend time writing one, and not get any tangible benefit out of it? But nevertheless, people do it, and that is
because they feel obligated and connected to the community and feel like they are helping other people. All of
the above examples show irrationality of human behavior; sometimes good and sometimes bad.
Do you see behavioral inefficiencies reducing in the future? What could help people make better
buying decisions e.g. AI powered Avatars or concierges?
First of all, I want to clarify that while we are talking about behavioral irrationalities here, not all irrationalities
are negative. I think we can reduce irrationalities to some extent using such tools, but it wont be easy. It is
hard to suppress a lot of these inefficiencies because often they come at a time of big decisions when we
decide to buy a home, for example. It is very hard to make those important decisions well and technological
tools are not really helping people in those areas. So there is definitely potential in those types of cases - for
example in helping people decide which house they should buy and why - but I dont see a lot of activity in
those areas yet.
What is it within peoples minds that draws them so powerfully to brands? Is it getting more or less
difficult for brands to develop in the digital world? Are brands becoming more or less powerful?
Brands embody multiple things. There are some things about brands which we use as a shortcut for
information. So, for example, when I say Sony or Apple or Porsche, you already know something about those
companies, what their product is, what they stand for etc. And from that perspective, given that we dont have
access to all the aspects of the product in the online world, brands can actually become more important.
Brands are also tools for signaling to yourself and other people. So if I wear a fancy undergarment, I feel
different about myself because of it. This signaling effect works to the extent that brands are often important to
determine both what I think of myself and what people think of me.
And so, the brands that will get eroded in the digital world are those that convey information that you can get
elsewhere. For example, if there was a brand for big and small hard drives, it is likely to become less important
as you can easily describe the product in other ways. But for brands of products that we cant experience
online or those that are used for signaling are unlikely to go away; such brands might get even more powerful.
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We often pay too much when we pay nothing. Can you talk more about this, particularly in the context
that a lot of digital services, be it Google search, Facebook, or Wikipedia are seemingly free.
We love free
so much that we are
willing to pay instead
with our time and
attention, and in the
process we can
effectively end up
paying a high cost.
Wikipedia I think is an exception here, but firms like Google and Facebook grab a lot of our time and attention
with advertisements. Consider how much Google and Facebook are making from each of us in ad revenues
and if they are really free products? If Google and Facebook said that for $x a year, they wont show any ads,
such a proposition might actually be valuable for many users. Thats because while some ads are really great,
others can at times be distracting, misleading and confusing, appearing like real posts, when they are not. The
fact that we want things for free is creating this situation; we love free so much that we are willing to pay
instead with our time and attention, and in the process we can effectively end up paying a high cost.
Has information and the data explosion made it easier for us to make more rational decisions or has it
added to the complexity of decision making?
It has certainly added to the complexity. When we have more options to choose from and consider, the
difficulty of decision making increases. Think of the number of healthcare insurance choices we have and how
it has made the process more complex; or of the options we have for investing in the markets. When there are
so many options to choose from, people just resort to very simplified strategies, in the process often making
decisions which may not necessarily have the best economic outcome for them.
Take financial decision making for instance. People seek financial advisory services for say a 1% fee, which is
an incredibly high cost to pay in order to not deal with the complexity of making investment related decisions.
In the domain of housing too, people pay a lot of money to the brokers who help them view houses and make
the purchase decision. People definitely need help in figuring out how to make the right decisions. We cant
deal with all the complexities involved in decisions and so we ask for help and pay a lot in the process.
Do you think crowdsourcing of ideas, or relying on tools like peer reviews for decision making
diminishes or amplifies human irrationalities?
It could do both depending on the situation. So lets say there is a ball and you want to find the right weight of
that ball. If you seek the wisdom of the crowd for such a situation and everybody guesses the weight, the
average guess is likely to be quite good. So when people have information which is distributed randomly and
average guesses are likely to be correct, getting more information from people is useful.
But this doesnt work in cases where you require expertise. If you wanted to figure out how to take diabetes
medication and only some people are experts in that area, you can find the right answer by talking to them. But
in those cases, when the expertise is not with the crowd, asking a lot of people will obviously be a mistake.
Sadly, there are many cases when we ask people for feedback on things they have no expertise on. And so,
the wisdom of the crowds is not always correct when the crowd does not have much idea on the subject or if
they have some biases.
How important are cultural norms in shaping consumer behavior?
Cultural norms are extremely important and can have a big effect in shaping behavior. How we view different
actions can change a lot for example based on the cultural norms that influence us. And so, what a brand
symbolizes in one country can be very different from what it may in another. As we become more
interconnected, things are certainly changing, but they are changing slower than you think. Take Europe for
example. We have had the European Union for a while now but the culture in France, Italy, Greece, Spain and
the UK are still very, very distinct and they dont seem to be moving together very quickly.
Why do you think irrationalities arent always bad?
Presumably, it is rational that people should just do things that benefit them. But nevertheless we see lots of
altruistic behavior. If you think about it, human kindness is irrational. Even in the digital world, open source is a
great example of people getting motivated by reputation and community and so the entire open source
revolution is an incredible idea in that sense. Wikipedia is another example of something that is irrational as
people are ultimately helping others with no benefit for themselves, but people still engage in the platform.
How likely do you believe it is that future political/democratic processes will be influenced by social
media, search engine optimization, or the so-called "digital gerrymandering."
Very much so. As we get more and more information, it is increasingly harder to be experts on everything. And
so, we rely more on what we think is right rather than something that we have the time to figure out for sure.
And so, the role of social media is getting bigger and therefore the kind of media we get exposed to will
influence what we think dramatically.
Originally featured in issue 104 on consumer behavior (Fortnightly Thoughts: Understanding the behavioral revolution?, April 12, 2016)
Special Issue
Interview withAswath Damodaran

About Aswath Damodaran
Aswath Damodaran is Professor of Finance at the Stern School of Business at NYU. His research interests lie in valuation, portfolio
management and applied corporate finance.
How do you think about making an investment decision?
When making an investment decision, an investor needs to understand what other people are pricing into the
stock. A charitable view of markets is that investors are pricing in optionality, where the success of a company
in one market allows them to enter another. Apple is a classic example of a company that gained from
optionality, where the iTunes store was used to launch the iPod, the iPod then led to the iPhone and the
iPhone to the iPad. Yet, nobody, not even Steve Jobs, could have forecast that opening the iTunes store
would lead to these different growth opportunities later; and thats what makes valuation difficult. Its almost
impossible to value options on an expectations basis because, by definition, an option is an unexpected event.
We have a tendency to use metrics like the price to earnings ratio, but these are measures that are designed
to value mature businesses and they fail to capture dynamic concepts like optionality. This is particularly true
for the tech space.
And how would you go about bringing that optionality into the investment process?
That depends on the type of company. If Im investing in a mature company like Coca-Cola I normally want the
value to be higher than the current price. Im not a rigid value investor but in mature companies, I want my
valuation to be 15% or 20% higher than the price before I buy in.
In the case of a younger company like Twitter, which I value at around US$26 per share, I employ a slightly
different approach. While my valuation is US$26, I place a buy limit at US$27 is that inconsistent with my
principle of buying companies where my valuation is greater than the price? It isnt, because, unlike CocaCola, where the upside is constrained due to its maturity, Twitter has a far longer tail of upside scenarios from
optionality and I show that using a Monte Carlo simulation. But as I mentioned its very difficult to quantify the
value of those exact options because the parameters are fuzzy; you dont even know what the potential market
is. In the case of Twitter, they could enter the retail market, the news market or the data market, for example.
By noting that these various options exist, I would be more willing to invest in a company like Twitter, even if it
is fairly valued. And thats how I conceptualize option value; it shows up more in the timing of my investment
decision than as an explicit add on to my valuation.
Which companies are best at creating optionality?
The competitive advantage that creates optionality and movement into new markets, in my mind, is exclusivity.
I find that all too often people talk of opportunity based on size alone; for example an investment might be
justified by potential growth in the Chinese market. Thats necessary for optionality, but it is not sufficient; for
me to invest in a company I need to know that there is a big market but crucially that the company has
exclusivity to it. For social media companies, that exclusivity comes from a big and involved user base. We live
in an era where there are many companies all competing for our attention, and despite that competitive
landscape a disproportionately large amount of our time is spent on a few sites (Facebook, for instance). My
view is that the stronger the claim to exclusivity, the greater your optionality. Another interesting example is the
rise of big data, a trend which is often seen as bringing about greater optionality. For instance Google and
Amazon have collected large amounts of customer data and investors see scope for monetizing it. The issue is
that as more companies build up more data about their users, the value and exclusivity of that data falls. So in
a sense the value of big data comes from the fact that so few people have it, and when more people have it
the competitive advantage is eroded.
There is of course an element of optionality that is management driven. For Apple it came from the fact that
they controlled the operating system; Steve Jobs decision to buy back the operating system, which Apple had
licensed out in the 1990s, may have been the most important decision he made. Owning the operating system
gave Apple the exclusivity to build multiple versions, and create multiple levels of disruption.
How does competitive advantage evolve over time and across companies?
The more mysterious a competitive advantage is, the longer it lasts. Brand name is a good example because it
has been one of the most sustainable competitive advantages, but no-one really knows what creates a wellrespected and admired brand name. A company like Coca-Cola can leverage its brand name for decades and
consistently earn excess returns. But now I see the nature of competitive advantage changing with the ubiquity
of technology. The life expectancy of competitive advantage is declining, and thats because technology
means that it is much easier, both in terms of time and cost, to replicate business models and processes. Just
look at how Google caught up with and surpassed Yahoos search engine; competitive advantage is becoming
far more transient. This has implications for the entire life cycle of companies. Historically, companies would
start off small and low value, over time becoming larger and higher value. It took time to build infrastructure
and it took time to build new markets. New technology companies on the other hand seem to jump right
through this; they can go from nothing to valuations of billions of dollars in a short period of time.
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If company life cycles are becoming shorter, how will that affect valuation methods?
We can no longer assume that competitive advantage will last a century as it used to for the old and mature
companies. Instead competitive advantage for tech companies comes with a life span that continues to
shorten. What this means is that youll climb faster as a company but fall faster too - Blackberry being a classic
example. Conventional stock analysis fails to capture these more compressed life cycles; we assume that
competitive advantages last forever. Using conventional techniques we might argue that a tech company is
undervalued on a P/E basis when actually it deserves to be lowly rated given there is a greater risk that a new
player enters and extracts market share.
How can investors ensure that their portfolios wont be disrupted by new competitors?
Diversification
shouldnt just be
across sectors, it
should also be
across corporate life
cycles.
They cant. But they can still diversify portfolios. Diversification shouldnt just be across sectors, it should also
be across corporate life cycles. So, if youre buying mature stocks with price to earnings ratios less than 10x,
because they look cheap relative to new players like Netflix, your portfolio is not diversified because youre
ignoring younger, higher priced disruptive companies. In fact by focusing on cheap mature companies your
portfolio is more susceptible to disruption and that should make any value investor uncomfortable. And for
growth investors it means investing in companies that are viewed as being in bad businesses that may
disappear with time. So, disruption proofing requires you to invest in some companies that youre not
comfortable with. When I teach my valuation class, I start the class by saying go where its darkest meaning
go with the uncertain, for example try to value a Greek shipping company or a Ukrainian mining company. It
will make you much more aware of how much uncertainty you dont control, and how you cant capture it all on
a spreadsheet.
Which industries are harder to disrupt?
Its tougher to disrupt service businesses. For example, I cant get my hair cut digitally. Healthcare is another
example because there are so many layers of human interaction that are difficult to control. Additionally, brand
names are also hard to disrupt even if individual segments of their businesses get disrupted. Portfolio
management is often seen as an industry ripe for disruption. While I agree with that thinking, I think disruption
will be slower than what the tech startups expect. Although these startups offer wealth management at a
considerably lower cost than traditional management, they struggle to replicate the psychological component
of what wealth advisors do. When your portfolio falls by 5% in one day, you want your wealth advisor to give
you their reassurance and empathy; Im not sure whether an app can do that.
Can companies self-disrupt to protect themselves from external disruptive forces?
They can, but it comes with its own challenges. Lets take the example of education, my own field, which I
think presents a compelling case for disruptors to move in and take market share. Many universities are now
offering online courses to both exploit the opportunity of online education and protect themselves from online
competitors. Even Harvard Business School now offers online courses including accounting and finance
modules. The problem is that traditional university education costs are around US$50,000 pa; but a shift online
may offer the same number of classes for around US$3,000. Students are going to start wondering what they
gain from the extra US$47,000. Therein lies the problem for incumbents; by unbundling to self-disrupt they
show what individual components are worth and expose their underlying business model.
As a second example, think of an airline starting its own budget airline with much lower fares than the existing
business say US$100 instead of US$200. Customers are going to begin to question whether the extra US$100
they pay is worth the additional legroom, small meal and other perks. Again the issue is that the underlying
business model is exposed; unbundling creates tensions if the subsidiary extracts demand from the parent. I
think its very difficult to self-disrupt and agree with Clayton Christensens thesis that disruption almost always
originates externally. Incumbents often think that by acquiring disruptors they can self-disrupt, but all too often
the disruptor gets integrated into the incumbents process and stops being effective at disruption. Thats
compounded by acquisitions coming at a premium, and even though the acquisition may help to protect the
incumbent, its impact on valuation can be limited due to the premium paid.
And how have barriers to entry changed?
I think there are two competing forces here; firstly the rise of tech has lowered barriers to entry but industry
wide consolidation has increased them. The rise of tech has undoubtedly made it easier to enter an industry,
and that brings both good news and bad news. The good news is that these new companies can earn much
higher returns on capital. The bad news links back to what I said earlier; your competitive advantage has
become far more transient and new companies can enter with ease. An opposing force comes in the form of
the major consolidation weve seen across industries in recent years. We now see fewer entertainment
companies, fewer transportation companies and fewer steel companies, for example. Consolidation will allow
incumbents to become more powerful and utilize economies of scale to make it harder for new entrants to
succeed. These two competing forces create an interesting dynamic. The greater the amount of consolidation,
the less likely it is that incumbents will try new things and innovate, and this increases the opportunity for
disruptors. Im not sure what the outcome will be, but these two forces are going to be key as to how markets
and businesses evolve.
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How do you think about companies that have entered a number of different product markets?
I feel that industry classifications are outdated. Modern multinationals span several different industry
segments; for example, Amazon is as much an entertainment company as it is a retail company. We will begin
to see these multinationals compete with each other in new markets; take online advertising for example.
Googles pre-tax operating margins are 25% while Facebooks are around 32% in this particular business line.
At some point its inevitable that they will start competing with each other, so Id expect to see those margins
come down. As companies diversify across markets, analysts need to think of out-of-the-box valuation
methods. Take Sprouts Farmers Market, the specialty grocery stores, for example; it may be more appropriate
to compare them with a high-end retail business as opposed to a typical grocery business. Given the rise of
big data analytics, we should be able to find better comparable firms, which match more appropriately on risk,
return and growth characteristics. One method Im currently exploring is how to group companies based on
how sensitive their revenues are to the overall economy.
Has the rise of tech impacted aggregate capital expenditure?
My fundamental issue with capex numbers is that we think of capex from an accounting standpoint. Capex is
seen as a line item in the cash flow statement, but thats only really applicable for the old manufacturing firms
that are entirely product-based. Now were seeing traditionally product-based companies shifting towards
offering services, and I have a feeling that a lot of capex has slipped out of the grasp of accounting and
actually shows up in operating expenses. Take Amazon for example; when they offer Amazon Prime at a loss
thats their version of capex to gain customers over the long term. So just because capex indicators might be
pointing downwards, Im not convinced by the notion that companies are investing less now than they did
before. I think its just that different companies are making the investments, and the composition of capex has
also changed in a way that is not easily captured by standard accounting.
Originally featured in issue 99 on thematic investing (Fortnightly Thoughts: What we think about when we think about themes, December
17, 2015)
Special Issue
Interview withGreg Mankiw

About Greg Mankiw
Gregory Mankiw is the Robert M. Beren Professor of Economics and Chairman of the Economics department at Harvard University. From
2003 to 2005 he served as Chairman of the President's Council of Economic Advisers.
What has driven the rise in income inequality in the US?
There are multiple forces at work which have increased inequality. While some have been benign, others have
proven to be pernicious. A benign force has been the addition of more women into the labour force which has
increased household inequality. Men with relatively high incomes are more likely to be married to women with
high incomes and this can be seen in the correlation between husbands' and wives' incomes, which has risen
substantially over the last few decades. More women entering the labour force, despite having a side effect of
increasing inequality, is not something we would want to reverse to reduce inequality.
On the other hand, inequality, to an extent, has been a function of an educational system which has failed
parts of the population and this should be addressed. It is important to understand that inequality here is a
symptom of the problem, and improving educational attainment especially amongst those at the bottom of the
economic ladder is a key part of the solution. Previously in the US, each consecutive generation received more
education than their parents, but this trend has plateaued over the last 20-30 years; we certainly haven't seen
big generational advances in education since the GI Bill generation graduated in the 1950s.
Apart from education, technology has been the other big driver of inequality. Technological progress increases
the demand for skilled workers, and in turn the premium paid relative to unskilled workers. The impact of this
phenomenon has been studied by economists for a very long time and the policy response should be to
increase the supply of skilled workers entering the labour market, which takes us back to why education is
important.
Inequality, to an
extent, has been a
function of an
educational system
which has failed parts
of the population and
this should be
addressed. It is
important to
understand that
inequality here is a
symptom of the
problem.
Finally, there has been the rise of the 'superstar' economy; technology has allowed certain individuals to
leverage their skills and address very, very big markets. I like to use the example of the actor Robert Downey
Jr. who made US$50 mn for his role in the movie The Avengers. Each person who went to watch the movie,
say in the US, probably contributed only US$0.25 out of the cost of his or her cinema ticket to Robert Downey
Jr, but when a film can be shown to an audience all over the world, that amount to US$50 mn. Clearly, 200
years ago this would not have been possible for an actor; no matter how good he was in a theatre in New York
or London, he could not have performed in front of enough people to earn the equivalent of US$50 mn.
And you could apply the same to the increases in CEO pay as well. As large corporations have become larger,
there has been the commensurate rise in responsibilities. Critics argue that the boards of directors have not
performed their duties and have allowed compensation to reach levels over and above the CEO's value to the
company. However, if this was the case companies owned by private equity firms, who do not suffer from the
same principal-agent problem as publicly traded companies would not pay their CEOs just as handsomely.
But justifying such a disparity is hard...
Most people's perception of the very wealthy, including mine, is dependent on how it was earned. The actor
Robert Downey Jr. made a movie that everybody enjoyed watching and the public can see how he made his
money, and therefore they do not really mind if he made US$50 mn. He did not make anyone's life worse off
by virtue of becoming richer, but in fact made the viewer's life better and created value for society. On the
other hand, Bernie Madoff, which I acknowledge is perhaps the most extreme case, acquired his wealth by
illegitimate means. Therefore, people's natural response is that he does not deserve it and something should
be done about it - his money should be taken away and he should be put in jail.
How much of a factor is low social or economic mobility for persistent inequality?
The most recent studies that have looked at the changes in mobility over time have found that it has remained
remarkably stable in the US. Even though lower mobility is a feature of the US relative to some European
countries that are more equal, the figure has not changed significantly to what it was 20-30 years ago. The
glass can be half-empty and half-full depending on how much mobility you previously thought there was.
A statistic to illustrate this point is to look at a child's expected position on the income distribution based on his
parents' income. Let's imagine that his parents are in the 99th percentile. If there is perfect mobility in society,
you would expect the child's eventual income to be in the middle of the population's distribution, i.e. the 50th
percentile. The data shows that in fact the child's income on average has been 65th percentile; that is above
average, but far below the top 1%. From my perspective, that means that there remains a healthy level of
mobility in the US economy, even though it is quite often portrayed as a static society.
How do you see governments responding to high income inequality? Voters in democracies are likely
to more strongly demand actions from policy makers...
The trend towards increasing inequality in the US began in the 1970s, and a reversal, if there is ever going to
be one, will take a number of decades and require the public to have realistic expectations. My fear is that
inequality will cause a variety of backlashes, including inclination away from globalisation, which may push
policymakers in the wrong direction. There have been worrying signals of this already happening. Democratic
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members of Congress have been balking at Obama's free trade policy agreements, and this does not bode
well for the US or the world economy. Contrary to popular belief, globalisation has not been a major factor that
has contributed to inequality in the same way as technology. If it had been so, then developing countries like
China, which experienced a large supply of unskilled workers entering the world market and thus wage
increases for the unskilled, should have seen falling levels of inequality. However, inequality has increased
there as well; this fact suggests that the advantages enabled by technology have been more significant as
drivers than globalisation.
Raising taxes is often cited as the most direct way to redistribute income. What in your view is the
optimal tax rate?
Even among professional economists, there are far-ranging views; some on the left believe the 75% top
marginal tax rate in France is a good thing, whereas others think the 40% tax rate in the US is already too
high. In the US, the top 1% pays relatively high taxes by historical standards and the middle relatively lower.
The effective tax rates on the top 1%, estimated by the Congressional Budget Office, are similar to 1979, just
before Ronald Reagan was elected on a platform of cutting taxes. Over this period, tax rates have been made
more progressive, although having said that, the increases in progressivity have been small compared to the
changes in inequality. Also, adjusting the tax rate has a very low impact on reducing inequality because the
before-tax income disparity is so high. To find a solution requires looking at the causes of before-tax income
inequality. Policies that similarly target an increase in the minimum wage are also not likely to help to solve the
underlying problem and serve only to have an adverse impact on the economy, which is why there should be
more of a focus on education. That takes time to influence inequality, more than a generation, but still, it's the
best way to go.
How should education be reformed?
Contrary to
popular belief,
globalisation has not
been a major factor
that has contributed
to inequality in the
same way as
technology. If it had
been so, then
developing countries
like China, which
experienced a large
supply of unskilled
workers entering the
world market and
thus wage increases
for the unskilled,
should have seen
falling levels of
inequality.
The difference in earnings between those who go to college versus those who graduate from high-school is as
high as it has ever been. In addition, the return on going to graduate school after college remains meaningful.
So, a step in the right direction is to increase the years of schooling.And it's not just about quantity; increasing
the quality of schooling is also necessary and requires educational reforms to take place. Unfortunately, I do
not believe a single administration in office for four or eight years can have a big enough impact, because it
requires a whole generation to undo some of the mistakes made over the past few decades. There needs to
be more emphasis on increasing students' attainment in the sciences and mathematics. English literature is a
great subject to study, but I would encourage spending more time teaching students a broader set of writing
skills. I do not believe, for example, that students are being asked as often to write non-fiction like Malcolm
Gladwell, in comparison to writing and analysing the fictional works of Jane Eyre. In areas such as
mathematics I believe there should be a focus on teaching students more statistics. Topics such as Euclidean
geometry, although a beautiful section of mathematics, are probably not as important in the modern world.
Nevertheless, I do not believe there exists a perfect standard to measure education systems against.
International standards only look at some aspects, and do not measure, for example, the level of creativity.
This raises the question as to whether Asian education systems can produce a creative workforce, given that
students tend to spend most of their very long hours learning the nuts and bolts of maths and science, but may
offer students fewer creative outlets.
How important is the role of technology in solving the problems in education?
In recent years, there have been a number of new developments and investments taking place in the
education and technology arena. A successful innovator has been the Khan Academy, a non-profit video
tutorial website that has provided over 300 million lessons to students around the globe. Harvard has also
made large investments in massive open online courses (MOOCs) which offer course materials for distance
learning. However, my sense so far has been that reality has undershot expectations. I am sceptical that
MOOCs will be able to replicate the relationship fostered by the face-to-face interaction of a teacher, and this
has partly been evidenced by the very high dropout rates in these courses. The truth remains that for an
individual who is dedicated, a lot can be learnt from just sitting in a library and picking up a textbook. However,
most people cannot do this and require qualified teachers who in many ways act like coaches in creating the
right social setting and motivating students. There is some promise in online education, but so far we are yet to
see significant progress.
Originally featured in issue 71 on income inequality (Fortnightly Thoughts: Unequal Income, unequal implications, March 27, 2014)
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Interview withEdward Chancellor

About Edward Chancellor
Edward Chancellor is an award-winning financial journalist, who has written for the Financial Times, Wall Street Journal, and many other
publications. He is also a former member of the asset allocation team at GMO, a Boston-based investment firm. Mr. Chancellor has
authored several books including Devil Take the Hindmost: A History of Financial Speculation (FSG, 1999), a New York Times Notable
Book of the Year. He has also edited two publications for Marathon Asset Management: Capital Returns and Capital Account: A Fund
Manager Reports on a Turbulent Decade, 1993-2002.
What are the fundamental factors that drive a boom-bust cycle in an industry?
From the behavioural end, bubbles arise when people have overinflated expectations for a particular sector. A
bubble can also arise when interest rates are too low - what we get is a monetary bubble, and we can see that
speculative bubbles tend to occur around periods of easy money. Such analysis around the dynamics of
system fragility and the dangers of setting a low interest rate has been a big part of my work so far, and even
now, Im writing about the consequences of the ultra-low interest rates that we have been living in since the
financial crisis.
Can you talk about a few examples where we have seen overinvestments in the past and the common
thread across those cases?
Sure. Ill start with a few examples that Andrew Odlyzko of the University of Minnesota, Minneapolis has
written about. He has pointed out that in 2000, internet data traffic was actually growing at only half the
reported usage rate. But many companies were using the false traffic growth stats to justify huge amounts of
capital spending. It was this myth of astronomical traffic growth that directed huge capital flows into the sector
and inflated the tech bubble. Andrews work also shows the impact of overinvestment in the British railway
space. He charts the railway stocks prices during the 1830s to 1850s against the acts of Parliament
authorizing new miles of railway, you will see that they run pretty close together. The Canal Mania of the 1780s
is another historical example of overinvestment.
The key takeaway from all these examples is that market booms generate capital spending which then drives
mean reversions. Overinvestment, as we saw in both the British canals and railways, can permanently destroy
returns for a sector.
The pattern of events is generally this - the first mover gets high returns on equity in a new technology. This
triggers a surge of investment in the sector. If assets have a long shelf life and dont disappear, such as canals
or railways, investors can get locked into permanently low returns. Monetary policy or speculative euphoria can
create a capital boom. What I find particularly interesting is how these seemingly obvious insights are rarely
acted upon. A similar story is now unfolding with respect to China. People have woken up to the
overinvestment in mining and the supply side developments in the energy sector only in the last couple of
years. Anyone with a capital cycle framework should have realized that measures like capex to depreciation
were becoming very high for the miners.
Why do people take so long to exit sectors where evidence of overinvestment is building up?
The markets short-term horizon, focus on EPS growth and other near-term performance measures is one key
reason. Also, even when some investors are aware of the developments on the supply side, the fantasy of
demand keeps them in the game. The other problem is that capital cycles differ for each industry. And, timing
the turn ex-ante is pretty much impossible. So, to avoid the aftermaths of things like the mining supercycle,
investors have to be long-termist and very obdurate in sticking to their positions.
Also, analysts spend too much time thinking about the P&L statement and traditional valuation measures for
their companies, but they dont spend enough time looking at the balance sheet and cash flows, which are
often negative when capital spending is booming. Take the classic case of homebuilders. Even in boom
periods, while they generate high profits, they tend to bid up the price of land, and so, their cash flow is
actually quite weak. Back in 2005-06, quite a few well known value investors thought that buying home
builders was a good idea as they were trading close to their trough levels on price to book. What they missed
was that the book itself had been increasing at around 25% a year for five years straight. This is what I call a
fundamental bubble; i.e., the valuations may look cheap, but the asset itself is a bubble. This was true in the
case of US housing and we are seeing a rerun of the same phenomenon for miners.
Where else do you see meaningful overinvestment?
China and emerging markets more broadly have been the boom sectors in terms of credit and capital flows
over the last eight to ten years. So there is massive capital concentration in China. Also, a lot of money has
been invested in building logistics for the resources sectors, and this is true in Brazil, for example.
The tech sector is similarly attracting a lot of capital right now. There has been a lot of excitement around
unicorns. In my opinion, when interest rates are low, speculative assets with no yield get bid up in the market
its no coincidence that Bitcoin bubbled and crashed at a time of zero rates. Abundance of capital is very much
at play here.
12
you could
argue that because
of low interest rates
London today is
overrun by Uber
taxis.
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So, from a global perspective on one end we have China with massive capex, poor cash flows, and really
weak returns, and on the other, we have platform companies with low capex and in some ways artificially high
returns. That tends to exacerbate when the capital cycle stops working you could argue that because of low
interest rates London today is overrun by Uber taxis. The European and US auto industries clearly should
have gone through massive consolidation in 2008, but that didnt happen.
Do you think that increasingly consolidated industries will exhibit better capex discipline?
Whether consolidation leads to a more disciplined capital cycle or not depends on the industry and players, so
we will have to look at each industry on its own merits.
On one hand, airline companies have shown some capex discipline post consolidation. Three to four years
ago only a few smart investors were able to overcome the conventional bias against the airline sector they
made a lot of money. But on the other hand, we also have examples of some very concentrated industries that
show a lack of discipline. Mining is a good example here. It is an extremely concentrated industry with a
handful of big companies like Vale, Rio and BHP controlling supply. So theoretically, we should have expected
the big miners to show some capex discipline at the time of the disruptive entry of a fourth player, Fortescue.
But instead, what we saw was an increase in production last year. And the miners are spending similarly this
year too. BHP even said that the lowest-cost producer has the right to continue producing. The fine art auction
market provides another apt example; despite having a duopoly, Sothebys and Christies do not really
cooperate. The same can perhaps be said about Airbus and Boeing too.
I also dont think that measures like the Herfindahl-Hirschmann index which shows industry concentration can
provide a good indication of how supply discipline is evolving in a sector.
Industry conditions are constantly changing - investors need to look out for what Marathon calls the evolution
of cooperation among companies in a formerly highly competitive industry. This can lead to pricing discipline
and returns on capital may pick up faster than the market expects. There are no eternal truths here; things are
always changing and the drivers differ across industries. It is when the conventional wisdom of the market
adheres around a certain view and the underlying reality has changed a tiny bit, that a smart investor can gain
an edge. Let me use the fox-hedgehog analogy here. Investors need to be a bit of both. The capital cycle
approach requires being single-minded like a hedgehog, who know one thing namely, that returns on capital
are driven by changes on the supply side. The good capital cycle investor is also something of a fox, who likes
to sniff around different opportunities and applies his experience of the cycle in one industry to understand
developments in another. Drawing on previous experiences in this manner can be very useful for investors.
So what is the bigger concern for miners going forward the demand slowdown in China or lack of
supply discipline?
Ive been a severe China bear for a very long time, but abnormal demand from China was just one side of the
capital cycle story for the miners. Even if you ignore China, there are sufficient reasons to be fairly bearish
about miners going forward purely on a capital cycle argument. The BHPs, Rios and Vales of this world will
carry on digging because the supply cost curve has flattened. i.e. they can produce more at a lower cost. And
so, theyll carry on bringing more supply which will eventually bankrupt the industry. Its tempting to catch
falling knives, but you can be fairly bearish on the miners today even if you didnt account for the impact of
Chinas rebalancing. This is the trouble; as investment strategist Russell Napier commented analysts spend
90% of their time looking at demand, and 10% looking at supply. And, it should be the other way around.
Originally featured in issue 102 on investment cycles (Fortnightly Thoughts: The long, slow recovery for mining, February 18, 2016)
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Special Issue
Interview withPeter Diamandis

About Peter Diamandis
Peter H. Diamandis is the founder and chairman of the XPRIZE Foundation, the co-founder and chairman of Singularity University and the
co-author of the book Abundance: The Future Is Better Than You Think. He is also the former CEO and co-founder of the Zero-Gravity
Corporation, the co-founder and vice chairman of Space Adventures Ltd., the founder and chairman of the Rocket Racing League, the cofounder of the International Space University and the co-founder of Planetary Resources.
Can you talk about the role of technology in driving the shift towards abundance?
In the traditional business model, we saw companies make money either by guarding a set of resources to
make them scarce, or to process scarce resources, whether its diamonds, other precious metals or
information, so that they could be sold to the world. But now, exponentially accelerating technologies are
helping us produce what used to be scarce in huge volumes, and making them near abundant. I would
suggest that there is nothing that is truly scarce anymore be it time, money, expertise, energy, food or health,
everything is becoming relatively more abundant than it used to. And this shift towards relative abundance is
being driven by technological developments in areas like sensors, networks, AI, robotics, 3-D printing,
synthetic biology, nano-materials and virtual worlds and access to near infinite computing power. Further, we
also have access to a cognitive surplus of a kind that is emerging as a result of more and more people with
expertise being connected to powerful technologies which allow them to solve more problems in less time.
So, 1,000 years ago, the best that even the kings and queens could do to solve problems on a national or
global scale was to deploy their troops. One hundred years ago, it was industrialists who could address some
constraints, by building railroads and steel mills etc. But today, the number of people able to take action has
exploded, because technologies that were only available to governments and corporations 20 years ago are
now readily accessible to all. Capital is similarly more easily accessible to people with expertise, thanks to the
development of angel and virtual networks, and crowd-funding platforms.
I believe technologies go through 6 Ds of exponential growth - as things digitise, they enter a period of
deceptive growth and then disruptive growth. Then, the technology becomes dematerialised, demonetised and
democratised. And this can happen because the marginal cost of replication and distribution is near zero in the
digital format. So ultimately, the once scarce physical good becomes available not just to the few people who
can pay a huge amount of money for it, but to the entire world instead.
Where are we likely to see the impact of this phenomenon next?
The force of these 6 Ds is disrupting industry after industry and I believe healthcare and education will go
through this cycle in the next ten years, along with industries such as insurance and finance. And as industries
such as education become demonetised, a billionaire in Manhattan and a teenager in an emerging economy
will have equal access to the best teachers that they can then learn from at effectively zero cost.
Dematerialisation should also disrupt middle men in many cases and give customers direct access to the
product in a cheaper, faster and more scalable manner. Real estate agents, for example, should become less
valuable as technology progresses and eventually allows people to have virtual tours of the property at a time
convenient to them, while some form of AI answers all their questions. Take it a step forward, and it might also
be possible to try different modes and changes in the house and find out how much they will cost, or have real
time bids on the financing of the place.
All this should drive a change in consumer behaviour as well...
Absolutely. With cost of accessing goods and services approaching zero in multiple industries - be it autos,
education or healthcare - were heading toward an interesting change in capitalism as we know it.
Instead of buying a fancy car which remains parked in the garage for 96% of the time for instance, we are
moving towards an era where people can fulfil their needs through autonomous cars without having to spend
any money owning the car. Even the energy cost can fall dramatically if the autonomous car runs on electricity
instead of traditional fuel.
Further, while only the wealthy have been able to afford a chauffeur in the past, autonomous cars and
platforms like Uber have now made chauffeur service one of the most cost-effective approaches for
transportation. So the thoughts around the utility of cars are surely changing, particularly in the younger
generations.
What is becoming abundant and what is still scarce?
Energy is already becoming abundant, as are most material resources. And while information is still valued
and there are certain forms of information that people want to hold onto and restrict, to some extent a lot of
information can also be duplicated, be it in the form of a scan of a design, or through the use of infinite
computing to model a million different variants to arrive at the right solution.
Also, scarcity is often a matter of view point. i.e., certain resources like strategic metals, platinum group metals
etc., while scarce on earth, no longer appear scarce if we extend our horizon. The company Planetary
Resources for example works towards retrieving strategic materials from approaching asteroids which
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Special Issue
energetically are much closer to the Earth and the Moon and tend to be rich in fuels, platinum group metals,
construction materials etc.
In essence, technology is a dominant force that takes what used to be scarce and makes it abundant. It is
almost like a ladder that allows us to reach higher and move away from the scarcity that is created
momentarily when the low hanging fruits are exhausted in an industry. O&G used to be scarce when we were
only able to drill 1,000-5,000 meters below the oceans surface for instance, but oil became abundant once we
developed the technology for deep ocean drilling, which allowed us to unlock more energy in an economically
viable fashion. The same thing happened in food. And we are similarly moving towards abundance in other
sectors too, but this shift is likely to include some turbulent times on the economics front for businesses that
are being disrupted by new business models.
Theres massive risk in the world for people and physical assets then...
Yes, there is. Of course there are fundamental resources and infrastructure such as servers which still need to
exist and wont be dematerialised, but overall, we dont necessarily need to own a lot of the things that we
used to anymore. And while people may still buy cars or refrigerators if they enjoy driving or cooking for
instance, goods like these are no longer essential to maintain a standard of living. It is possible to economically
order out every day and have the food delivered at your doorsteps at a convenient time for example.
I would
suggest that there is
nothing that is truly
scarce anymore
be it time, money,
expertise, energy,
food or health,
everything is
becoming relatively
more abundant.
So what kind of companies will succeed in the world of abundance?

Theres only one Google, one Amazon, one eBay and what makes it hard to replicate these companies is not
just their IP but their broad reach and the fact that their search engine algorithms have become extremely
good, due to the number of searches that are done on them. And this network effect should help the winnertakes-all trend to persist in a large number of areas going forward. One of my companies Human Longevity
Inc. for example is focused on creating the most valuable database of biological information in the world and
building it so fast and so big that it becomes sensible for everybody to add their data to our system rather than
starting their own database from scratch. In short, companies that are globally dominant network effect players
hold tremendous value propositions for the world and will continue to succeed.
How do you respond to the relatively pessimistic counterarguments you hear around innovation?
People who hold a more pessimistic view about innovation often say that the rate of change in human life
expectancy has stagnated, or that jet planes are no longer becoming faster on a 30 year view. And while all
that may be true, what these arguments dont consider is the progress being made on new parameters. A high
fidelity virtual world for example can allow people to experience the same setting as some far-off place
instantaneously, and we already have early versions of telepresence from Cisco in this domain. There have
been other investments in this area including Google - Magic Leap, Microsoft - HoloLens, and Facebook Oculus Rift, and at some point, we may see developments in this area displace the need for point to point
travel.
Similarly, while the increase in rate of human longevity is slowing as a function of how it was growing until now,
we are finally progressing towards unlocking the understanding of the genome and fundamentally
understanding the code that makes people live to over 120, the changes in stem cells that make them unable
to repair and other mechanisms which once uncovered can extend the human life span significantly in one go.
Even in terms of experiences, while there is certainly a difference between seeing the actual Mona Lisa at the
Louvre and owning a replica or looking at a replica online, the difference isnt always sufficient to make the
alternative invaluable. And so, eventually, if people could go on a virtual adventure to some far-off place, and
have a compelling experience which feels so real that they gather 90% of the value of that experience,
experiences that are currently scarce and accessible to only 0.001% of the worlds population will also become
more broadly available.
Where do you see prices coming down as scarcity cedes to abundance?
Healthcare and education for sure, which is why I think they will soon be dematerialised. 3D printing should
similarly disintermediate some manufacturing and make things like apparel manufacturing more personalised,
allowing for perfectly tailored custom clothing. The current retail experience which involves a lot of time to
purchase clothes that may not even fit, should similarly get disrupted to an extent.
So are we moving to an 'everything as a service' economy where people will own a lot less of
everything as it becomes accessible as a service?
If the service that is available is better in terms of lower maintenance, lower overhead cost, lower time
overhead or other things that matter, then yes, people will own a lot less of everything. The car is a perfect
example and we will similarly see a lot of the things that we physically own right now, move towards becoming
accessible as a service.
Which countries do you think will succeed on a twenty year horizon?
We live in a world of porous borders where the ability for technology, people and capital to move to a green
field regime where regulation is not a hurdle, is extremely easy. And so, the countries that succeed will be
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those that are the most agile with their policy making and that seek to become the home of entrepreneurs by
supporting them and allowing them to experiment with new products and business models.
The US of course enjoys an advantage in this area given its bankruptcy laws, culture of experimentation and
an entrepreneurial engine in the form of Silicon Valley, but a wrong regulatory regime which shuts innovation
by putting up regulatory hurdles can be quite detrimental even to the US. And so, I believe that we may see
smaller countries like the Emirates, Israel, Holland and Singapore succeed too, given the less risk-adverse
nature that their regulatory bodies often have.
Originally featured in issue 86 on scarcity (Fortnightly Thoughts: Scarcity in a sea of abundance, March 24, 2015)
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Interview withErik Brynjolfsson

About Erik Brynjolfsson
Erik Brynjolfsson is the Schussel Family Professor of Management Science and Director of the MIT Center for Digital Business at the MIT
Sloan School of Management. His research examines the effects of information technologies on business strategy, productivity and
performance, Internet commerce, pricing models and intangible assets. He has also co-authored several books including, Race Against the
Machine and The Second Machine Age.
How do you think about disruptive innovation? And are we at the beginning or at the end of a period of
disruption?
We are in the midst of two disruptive innovations that will happen only once in the history of humanity. The first
is the emergence of machine intelligence, including machine learning ability, artificial intelligence and the
ability of machines to solve a whole class of structured and unstructured problems. Machine intelligence will
penetrate many different sectors, especially for the information-intensive tasks that over 60% of Americans do
for their jobs.
We are in the
midst of two
disruptive
innovations that will
happen only once in
the history of
humanity.
The second great disruption is enabled by the internet that provides a digital infrastructure by connecting most
of the 7 bn people on the planet. The network created by the internet provides access to the world's supply of
knowledge. Whats more, it is now also a platform for billions of people to contribute and add to that
knowledge. As a consequence, the pace of innovation multiplies as people combine ideas and previous
inventions. And disruption is only going to accelerate. Remarkable technologies which may have been
considered science fiction 10 years ago are fast becoming reality. From self-driving cars to machines that can
be spoken to and expected to follow instructions. Machines are also starting to solve unstructured problems
including medical diagnosis, investment advice and legal recommendations. The disruption weve seen over
the past decade is just the beginning. Much bigger changes are in store for the next decade.
What have been the implications of this disruptive period for the labour force and productivity?
There definitely exists a dislocation in the labour market, and that hasnt just been driven by changing
demographics. The employment-to-population ratio in the US has been falling since the 1990s.
Falling median incomes over the past 20 years paint an even starker picture of a stagnant labour market.
Through most of history, increases in labour productivity, GDP per capita and median incomes have moved in
lockstep. There had been an implicit social contract that advances in technology led to shared prosperity, and
this was the case during most of the 20th century. However, over the past two decades this trend has not held.
This is what my colleague Prof. Andrew McAfee and I describe as the Great Decoupling.
Although median income has stagnated, productivity has been increasing as a result of technological
advances. In the 2000s, there was faster productivity growth than the 1990s, and likewise in the 1990s relative
to the 1980s. To be sure, in the most recent few years, during and following the financial crisis, the increases
have not been as high. But thats what happens when youre in the midst of a powerful business cycle
downturn.
There are also two very important features that are not captured in the productivity statistics. Firstly, they do
not capture the benefits from the digital revolution and the many new, often free products people increasingly
have access to. For example, Wikipedia and smart-phone applications do not show up in the official GDP
statistics which skews productivity to the downside. Secondly, technological innovation can take decades to
play out. The first industrial revolution set off a wave of innovations that took a century to fully materialise.
Does that timeline apply for modern innovations too, or do you see the consequences of disruptive
new trends being realised quicker?
Relative to history, core technologies are advancing at a faster pace. For inventions such as the steam engine,
it took 70 years for there to be a doubling of its power capability. In computing, the doubling happens once
every 18 to 24 months. As a result, there is wave, after wave of new technology developed, and as each
decade passes, this translates to a hundred-fold improvement in the underlying capability.
However, the benefits from this core technology require a set of complementary innovations in organisations,
business models, skills and human capital which takes decades to play out. In other words, if core
technologies stopped improving today there would still be decades worth of improvements to be made. For
example, harnessing the power of smartphones, computers and big data is still in its early stages and
entrepreneurs are constantly creating new business models, organisational forms and developing new skills to
build on this technology.
What about the role of governments in driving this innovation?
Governments are essential in carrying out basic and fundamental research, and the more they invest in R&D
the faster an economy will grow. R&D cuts across developed nations hurt economic growth, especially in
areas such as healthcare, where the consequences sadly translate to greater suffering.
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However, it is not primarily the role of government bureaucrats, professors at MIT or even investment bankers
to be in charge of inventing new industries, products and services that use new technologies. In our economic
system, this task is assigned to entrepreneurs who can take risks and find the best applications for technology
to practically solve problems. In the first machine age, high growth was a result of not only inventions such as
the steam engine, but individuals who created new applications that used these technologies. Eventually, as
old jobs were automated away, it was people like Henry Ford who invented ways to create entirely new
industries. In the same tradition, Steve Jobs, Bill Gates and many others have done the same and invented
new goods and services. Unfortunately, entrepreneurship in America, despite the rhetoric, hasnt been strong
enough. The statistics show there are fewer new businesses being started compared to the past two decades.
And on the flipside, how are governments reacting to the negative implications of innovation,
particularly on employment?
Unemployment creates negative externalities where the whole community suffers from increases in crime,
divorce, teen pregnancy, drug use and other social problems. For this reason governments should be doing
more to foster job-creating entrepreneurship and not increasing burdens for employers. One of the first
principles of economics is to tax what you want less of, and subsidise what you want more of. Thus, we should
not be taxing employment, but rather encouraging it.
Paradoxically, the solution to greater automation is not to slowdown or penalise disrupters, but to speed up the
creative destruction process. Protecting the past from the future is pointless and thus speeding up the
invention of new products and services, what Joseph Schumpeter called creative destruction, should be
encouraged. For example, governments should not limit Uber introducing a new business model disrupting the
taxi industry. It is the governments role to create an environment that fosters entrepreneurship and speeds up
the adoption of new innovations. This creates a dynamic economy that can grow prosperously and ultimately
creates new jobs that are needed to replace the old ones that have been automated away.
But the pace of innovation is also driving wider income and wealth disparity...
True. Whilst there have been significant advances in technology developed globally, there is a widespread
disappointment with governments as they have been unable to respond to the changes. The dialogue taking
place is completely out of sync with the fundamental challenges the economy faces. Movements ranging from
the Tea Party to Occupy Wall Street, have in part, emerged from grievances that median incomes are lower
and the share of economic growth has not mirrored previous generations. However, there exists a
misdiagnosis of the core problem, as policy makers in particular have not understood the fundamental tectonic
shifts in the nature of the economy that have changed employment and median incomes. Education was a big
part of the response to the first machine age. Many commentators argue that one of the best ideas America
implemented was mass compulsory education, which took a nation of farmers and prepared them for
manufacturing and service jobs. Correspondingly, this was followed by the invention of the high school in the
early 20th century and then the GI Bill of Rights which provided college education for millions.
The solution is not simply to invest more money into education (although that wouldnt hurt), but to reinvent
content and delivery. Improving content first requires a movement away from the 20th century model of having
students sit in rows of desks and listen obediently to instructions. Whilst this may have been good for Henry
Ford's factory in the 20th century, going forward this will not be in demand as machines are extremely good at
following instructions. What will be required is greater creativity, the ability to think of new inventions and think
outside the box. There also needs to be a greater emphasis on the development of emotional intelligence so
people can work better in teams, learn how to motivate others and inspire people. I believe both creativity and
teamwork are teachable, but not under the methods found in 20th century classrooms. For example, if you
look at any young child, prior to starting school, he or she is naturally curious and creative. If the system
allowed people to retain some of the innate curiosity and creativity that most people are born with, it would be
winning half the battle towards addressing the lack of this feature in modern systems. Secondly, there is an
enormous opportunity to use digital technologies to improve content delivery. This can be done by replicating
the best teaching methods and practices globally which is not just confined to MOOCs (massive open online
courses).
In addition, digitisation enables the datafication of education which allows teachers to track what students are
listening to and how they are completing problem sets. Analysing how students learn using gigabytes of data
and how they behave second to second allows greater customisation of content to different learning styles.
Therefore, a data-driven environment allows not only for a higher level of education, but also a higher rate of
improvement that is just not possible in an analog environment
What are the new professions that can replace jobs that are being automated away?
Professions that involve routine information processing are being displaced by machines, from book-keeping
to travel agents and even roles filled by first-year law associates. At the same time, there is a fundamental shift
in the set of skills that are in demand and this evolution and change is happening at a much faster rate than
historically. Previously, an individual could learn a trade in their 20s and expect to be employed for the next 40
years, which is no longer the case. As a result, there has to be greater emphasis on updating skills, learning
new ways of becoming valuable on an ongoing basis that require more adult education, on-the-job learning
and more initiative on the part of every individual to keep up to date with the market's demand.
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The two
industries that have
been least impacted
by disruption and
are ripe for big
changes are
education and
healthcare.
Special Issue
Which industries do you think have been relatively immune to disruption so far and can that change?
The two industries that have been least impacted by disruption and are ripe for big changes are education and
healthcare. Both sectors have not shown significant improvements in productivity and as costs have risen they
have commanded an increasing share of GDP. This will however change as Big data penetrates both sectors.
Taking all that into account should we be excited or apprehensive of technologys broad implications?
There is often an argument between techno-optimists and pessimists. The former look to the past and argue
how technology has inevitably served to improve the world. On the other hand, pessimists point to falling
wages and job creation and paint a very dismal economic future. I believe both of these groups make the
same fundamental mistake as they treat technology as an exogenous force. The reality is that technology is
not destiny. Instead, technology is used as a tool to shape the future.
There is tremendous freedom and power to shape the world we want to live in and so there is no inevitable
utopia or dystopia. The outcomes depend very much on government policies, strategies pursued by
organisations, and the skills developed by individuals. Ultimately, a decision on values will shape how people
use technologies as they develop. Therefore, the good and bad news is that there is more power to shape the
world today than has been the case in history, and this requires people to be proactive and aware to make the
right decisions.
Originally featured in issue 73 on GDP (Fortnightly Thoughts: GDP: Forecasters friend or foe, May 1, 2014)
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Interview withRobert Cialdini

About Robert Cialdini
Dr. Cialdini is the CEO of INFLUENCE AT WORK; focusing on ethical influence training, corporate keynote programs, and the CMCT
(Cialdini Method Certified Trainer) program. His clients include organizations like Google, Microsoft, Cisco, Bayer, Coca Cola, KPMG,
Pfizer, IBM, etc. Dr. Cialdini has spent most of his career researching the science of influence and has also authored a few books including,
Influence: Science & Practice, which is a New York Times Bestseller and has been published in over 30 languages.
Have your six principles of influence changed as were living in an increasingly digital age?
The principles themselves havent changed. They are based on some fairly fundamental human tendencies.
What has changed though is the priority of the principles in terms of how good they are at influencing choices.
The principle of social proof in particular has become much more prominent as a lever of influence, essentially
because of the digital revolution.
We are now able to access information on the opinions, perceptions and choices of hundreds or thousands of
individuals on a particular issue; something that was just not possible before the internet. Reviews are also
very popular now and so the capacity to look at choices of others as an indication of what is likely to be an
appropriate choice for us has just skyrocketed.
The 6 principles of influence

Reciprocation: People feel indebted to those who do something for them and feel that they should try to repay in kind, what
another person has provided.
Social Proof: When people are uncertain about what to do, they look to those around them to guide their decisions.
Commitment and Consistency: There is a desire to be (and to appear) consistent with what we have already done. Once we have
made a choice or taken a stand, we will encounter interpersonal pressures to behave consistently with that commitment.
Liking: People say yes to those they know and like. Physical attributes, compliments, similarity, contact, cooperation and
conditioning & association all impact liking.
Authority: People respect authority and want to follow the lead of real experts.
Scarcity: Perceived scarcity generates demand; opportunities seem more valuable to us when their availability is limited.
The rise of social proof based business models where people depend on reviews to make decisions
has certainly been fascinating. Do you think this can lead to idea contagion where good reviews beget
good reviews, bad beget bad and a scenario where everyone ends up thinking alike?
Fortunately, while that tends to happen in the short term, over the long run as the number of reviews increase,
the momentum of only good or bad reviews tends to be broken. In other words, if a lot of people form a similar
opinion about something, it raises interest in that product or service for the broader audience, and as they
investigate the option and alternatives, the true merit of the thing comes to the fore. The likelihood that an idea,
product or service will be sampled by a desirable number of individuals, allows for truly meritorious options to
be successful over the long term, thus making social proof very relevant, even though a few biases may creep
up initially. Let me give you an example of another bias that behavioral scientists have identified. The fluency
or ease with which an individual can process a particular idea or concept can also influence how popular it is.
Things that are easier to understand or even read or pronounce can be more attractive to people because it
seems familiar. Research from two major stock exchanges show that the stocks of companies with easy to
pronounce names do significantly better in the first six weeks of IPO than those that have a difficult to
pronounce name. The same is true for stock ticker symbols too; easy to pronounce symbols do significantly
better in the first two months after IPO. But, in both cases, the biases tend to disappear by six months. In
short, while it is possible that the initial tendencies of a group may create influence in a particular direction,
these biases get suppressed in the long run.
Many consumers these days are asked to like or rate products on a daily basis. Do you think this
dilutes the signaling ability of customers approval for products?
If providing a good rating for a product has come about as a result of a tradeoff or reciprocity (e.g. a scenario
where I will give you a positive review if you give me a positive one), then the positive review has nothing to do
with the merits of the person or service provided. Rather, it has come due to an obligation that exists within the
social arrangement. In such a case, where the like represents something other than genuine attraction, the
credibility of that like is diluted in the minds of observers. As that happens, we do see some dilution of the
credibility of positive ratings.
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Does more data on individuals make it easier or more complicated for companies to influence
purchasers decisions?
Its more complicated now to generate information. i.e., there are more steps required to understand
consumers than simply meeting someone and getting down to business after a few moments of social
exchange. But at the same time, it is easier to possess effective information as a wider range of data is
available on people which they have put up on social media voluntarily. So before doing business with
someone, it is much easier to find commonalities that we share with them. For example, people entering a
negotiation may learn that they both like ice hockey, or that they are both runners, or have teenagers. If they
raise that factor to consciousness, the evidence is that negotiations will go better as there will be an immediate
sense of rapport or connection that that will be felt between the parties. So with more opportunities to get
information about the individuals who we are dealing with now, exchanging the information that causes mutual
rapport to develop is easier, and that results in a much better outcome at the end of the day.
Do you think people increasingly care less about owning physical things, and more about
experiences?
Experiences
should be more
valued than material
products, because
there is evidence
that they make us
much happier.
Experiences should be more valued than material products, because there is evidence that they make us
much happier. A happy time and experience on a vacation for example makes us happier than the generation
of the money that allowed us to pay for the same vacation. The same is true for smaller experiences like going
out to dinner with good friends. These things lead to greater life satisfaction than positive monetary outcomes.
The problem is that most people dont recognize that. We keep thinking that the means are the end when we
should actually categorize them differently as one is much less satisfying than the other.
Is it getting harder for companies to create the perception of scarcity in a world where there is greater
information and choice, with fewer things that are actually scarce?
Absolutely. That means that even if a company has something that is abundant, it needs to highlight the
unique aspect of the product or service; what is rare or scarce within that offering even if its widely available.
There is always a FOMO (fear of missing out), so if there is limited access to a product, because you can only
get it for a certain time or only one vendor offers it, then this notion of missing out on a deal can be a very
powerful influencer.
Are the symbols of authority changing? For example, parents used to form a strong symbol of
authority for children but now the peers seem to matter a lot too.
Peers are becoming the symbol of authority to a greater extent than in the past as an increasing number of
people find peers more like them and much more diagnostic of what they are likely to enjoy. Of course, there
are still acknowledged experts who can command the attention of particular groups, but the relative impact of
peers versus authorities has definitely increased. The reason is that we have access to peers in ways we
never did before. Somebody in a different country with similar buying patterns or background can today be a
peer to me and I would have access to that persons reviews of products, which wasnt possible before the
internet. We have to understand the way in which technology and communication patterns have changed and
recognize how those changes influence the weight we should assign to the various principles of influence. So
while expert opinions are less powerful than they have been, if you get a consensus of expert opinions and
hence get social proof among experts, it vaults back up to high levels of impact.
Does the ad industry and broader corporate world realize the potential of incorporating behavioral
insights?
Were entering
a golden age of
behavioral science
now.
I am disappointed in the extent to which an average company recognizes the insights that are available to
them via behavioral science. The advertising community is catching up more rapidly than the broader
corporate world, but it is still very nascent. David Ogilvys book, Ogilvy on Advertising which is considered the
bible on modern advertising, said that when the headline of an ad is put in quotes, the recall increases by an
average of 28%. But it is only recently that a study found this increased recall was due to the use of
testimonials, which typically include quotation marks not quotation marks themselves. So behavioral
science has been able to un-pack the old belief and prove that it is the information from peers and experts that
increases effectiveness. Were entering a golden age of behavioral science now. Companies will have to
invest in understanding behavior if they want to stay competitive with their rivals who are investing in this.
Although still a minority, there are behavioral science units in many organizations already. This is happening
because of the recognition of the difference that can be made when one presents an offering in a way that
aligns with behavioral science insights versus not. In fact, often I have recommended corporate groups to
establish a chief persuasion officer within their organization. We have chief legal officers, chief financial
officers but we very rarely have chief persuasion officers- someone who can guide the company on the right
way to construct the messaging around its offerings, such that it is more impactful and allows people to
register the meritorious features of the product or service better.
Originally featured in issue 104 on consumer behavior (Fortnightly Thoughts: Understanding the behavioral revolution?, April 12, 2016)
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Interview withBenedict Evans

About Benedict Evans
Benedict Evans is a partner at Andreessen Horowitz. As a long-time mobile analyst, Benedict has been working in the media and
technology industries for 15 years. He first entered the industry as a sell-side equity analyst for investment banks before moving on to
strategy and business development roles at Orange, Channel 4 and NBC Universal. Benedict writes about and discusses strategic and
operating issues around consumer technology, ecosystems and mobile platform on his blog, and on Twitter @BenedictEvans.
The internet and smartphone revolution has made many things much easier and more accessible for
consumers. How do you see this evolving?
Many of these
start-ups that start
off trying to solve a
relatively small
problem, end up
creating a
completely new
product or service
and eventually end
up fundamentally
transforming the way
industries operate,
instead of just taking
some share away
from incumbents.
One of the fundamental changes we are witnessing as a result of smartphones is a move from one device per
household to one device per person, while at the same time we are moving away from being confined to a
particular location (say your living room) to having the device with you everywhere you go. And as we move
from the relatively simple interaction model of desktops, to the much more sophisticated environment of
smartphones, the possibilities around customer engagement are changing too. There is also a multiplier effect
as people do a lot more things much more frequently on a smartphone than those who are online only on the
web. And this in turn creates a broader set of digital content. Companies such as Google and Facebook for
instance can know exactly where you are, whether you are walking or standing still, who your friends are,
when your next meeting is etc., and they can target their offerings based on all of that information. Of course
the locational advantage of smartphones offers convenience to customers as well. The only thing that people
could do in bed earlier was watch TV or read a physical book before going to sleep, but by making it possible
to read or watch anything anywhere, tablets and smartphones have changed the nature of competition for
most media-focused business.
The other thing that grows as we move content to the digital world is the scope for greater unbundling. And this
in turn changes the selection behaviour that people exhibit while buying products and services. This is evident
in music; the ability to buy standalone tracks has changed the industry. I believe that the impact of unbundling
will soon become evident in the TV domain as well. And this will prove to be a much more interesting phase of
unbundling because its not just going to be about unbundling channels from cable boxes, but also unbundling
individual TV shows as independent brands. Once that happens, each show will have to compete on its own
merits and brand value. This also relates to the distribution channel, which hugely influences consumer
decisions; take what has happened in apparel for example. The amount of stock retailers can hold and the way
they display it significantly affects the implicit and explicit choices consumers make. And so, the decision
criteria and buying behaviour of people is completely different on the web and even more so on smartphones,
given that they make it even more convenient for people to see the product, add it to a list, find out more about
it, and buy it anywhere, anytime. Books, I think, are a great example here; books that are bought online tend to
be very different from books that are bought at bookshops.
Many of these solutions to inconveniences are driven by new entrants. At your firm, do you see this
often when entrepreneurs come to pitch their ideas?
This is a common element to a lot of successful start-ups. Pretty much everyone who comes to us with a good
idea is usually trying to solve a problem or attack a pain point for consumers. The other strand here is that
many successful start-ups emerge to tackle local inconveniences and then realise that the solutions can be
generalised globally. For example, the lack of good taxi services in San Francisco was one of the main
reasons for Uber to emerge here and I think it is unlikely that we would have seen someone in New York or
London come up with a service like Uber, simply because there wasnt a similarly big enough need for it. And it
doesnt stop there. Many of these start-ups that start off trying to solve a relatively small problem, end up
creating a completely new product or service and eventually end up fundamentally transforming the way
industries operate, instead of just taking some share away from incumbents. If we look at Uber again, it is not
only taking share from traditional taxi businesses, but it is also challenging the entire concept of owning a car.
Airbnb similarly is threatening the hotel industry, without actually owning any hotels.
And that is where the market opportunity lies. Many legacy business, whether taxis or hotels, exist to due to
some historical logistical issue. When these industries were born they were trying to solve other types of
problems. But if we shift these services to an entirely new digital platform, then the underlying problems might
change and the solutions need to change too. If you look at the magazine industry for example,
recommendation was one of the key leverage points for their business, and they thought it was unlikely that
independent blogs and new entities on the internet could seriously threaten that strength. But the incumbents
were running their businesses like a manufacturing company, in terms of how they priced and sold their
product. On those same terms, internet-based companies could run their businesses like light manufacturing
businesses (lower cost, greater flexibility) and that caused them most damage.
What about new products like smartwatches? Does the Apple Watch actually address a genuine pain
point and so will it be widely used in the future?
With respect to the Apple Watch in particular, I think it is positioned more as a pleasure product that gives
people a new experience rather than something that necessarily targets a specific problem. But the deeper
point to be kept in mind here is that when a consumer product or device is in its early stages of development,
most people often underestimate the problems it can address or how it can make life easier in the future,
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Special Issue
especially as it evolves into a better product and becomes more economical. When cars didnt exist, it didnt
seem like people needed them. Back in 1980, when a not so powerful, black and white computer sold for
US$5,000, a lot of people had doubts if (a) it would ever get better and cheaper, and (b) even assuming it did,
if would anyone want to use it. The same is true for mobile phones 20 years back. No one really thought then
that heavy US$1,000 devices would some day be this cheap and shrink to the size of playing cards. When
trying to find the total addressable market for phones back then, many analysts would have looked at
demographics, number of business travellers and similar factors. Even the most optimistic analysts would have
arrived at a market size estimate that is much lower than what it is today. Even if they believed that phones
would become extremely cheap, it would have required a huge mental leap for someone to conclude that
everyone in the world would eventually own a phone some day. But thats exactly where we seem to be
headed. The tablet and PC market is similarly set to top a billion units in sales. Now obviously, not every new
tech product will find that big a market. I dont think everyone will have a smartwatch in future, even if they
became really cheap, but the point Im trying to make is that it is still very hard for people to realise how widely
accepted new tech products can be in the future.
Do you think there is a risk that added convenience comes at the expense of privacy, and that at some
point we may see some backlash against it?
When a
consumer product or
device is in its early
stages of
development, most
people often
underestimate the
problems it can
address or how it
can make life easier
in the future,
especially as it
evolves into a better
product and
becomes more
economical.
There are a few things about privacy that are important to understand. Firstly, the attitude towards privacy risks
varies a lot by countries. Germans on average care about personal data and privacy much more than
Americans, and this stems from the countrys culture and political history. And Americans in turn care about
privacy more than the British. Secondly, concerns around privacy also differ by the value proposition of
products and the core promise of the brand in consideration. Banks for example inherently know the financial
status of their customers and phone companies know about their location. This has always been true and
acceptable in the physical world, but consumers at times get more sceptical about online privacy. Not all of
those concerns are entirely rational. And that really hurts brand image. Once consumers are angry about their
privacy being violated, they dont go back. And that is why, I think, people use multiple social networks and
messaging platforms. Facebook has positioned itself as a medium where nothing can be guaranteed to be
private and that positioning has meant that many users dont use it for private messages.
Also, while the subset of people who feel that privacy should be a big concern for everyone is an extremely
vocal one, a much larger proportion of people are actually more or less indifferent to online privacy of personal
data, or have already adjusted their behaviour based on data privacy concerns. Of course, there is another
subset of people who dont know the risks at all. But in general, most users now realise that Google knows
what they search for and are more or less ok with it. The continuously rising amount of content that people are
sharing on Facebook is another tangible metric that shows that the level of concern that people hold for their
data privacy online is often exaggerated. Many surveys around the topic further exaggerate the perception of
data privacy concerns, but in reality, those survey results are often significantly influenced by the way
questions were framed.
Which companies are consistently good at coming up with convenient offerings for their customers?
A facile answer to give here would be Silicon Valley, because as an ecosystem it consistently comes up with
more and more convenient offerings. But if we need to identify companies, Id say that Apple, Google,
Facebook and Amazon are the four companies that have built exceptional platforms that allow them to deliver
their services in a consistent way to users, and it is extremely tough to constantly come up with a flow of
innovative, delightful products like they have. But, while all of them are extremely good at their core
businesses, they are not so good when it comes to things outside their core competencies.In essence,
Amazon is the worlds biggest warehouse with a very good search engine, but a customer doesnt necessarily
discover anything new on Amazon if he or she didnt know what to look for. Similarly, Google is excellent at
things that fit into its data engine, but the company hasnt been very successful at areas that dont fit into its
model, and this is evident in most of the challenges that Google has faced. Facebook similarly has been very
good at surfing user behaviour, but not that good at shaping it. And we have seen that happen repeatedly
Facebook has tried many times to get subscribers to use the social network in a certain way, but it has rarely
worked in the first attempt. But, then again, Facebook has been very good at tracking and recognising what
people didnt like and adapting accordingly. And finally, Apple is extremely good at creating hardware that
delights people, but it isnt very good at, say artificial intelligence and other services. We could argue that this
is a deliberate choice that Apple has made, given that it can use something like Google for expertise in areas
like AI. But the broader point remains that all these four companies are have all struggled to replicate their
success in their core businesses anywhere else.
Originally featured in issue 89 on convenience (Fortnightly Thoughts: At your convenience, May 21, 2015)
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Interview withBranko Milanovi

About Branko Milanovi
Branko Milanovi is the visiting Professor at City University of New York Graduate Center and former lead economist at the World Banks
research group, where he worked on the topics of income inequality and globalisation. He is the author of The Haves and the Have-Nots:
A Brief and Idiosyncratic History of Global Inequality.
Is income inequality on the rise globally?
It is important to begin with a clear definition of global income inequality. The most commonly accepted use of
the term refers to inequality in what all the individuals in the world earn, regardless of the country of origin. This
form of global inequality has been slightly decreasing over the past 15 years or so. What is driving this decline
is that large and relatively poor countries, particularly China and India, have been growing significantly faster
than the rich countries, like the US. There are, of course, other countries apart from China, India and the US
that feed into global income inequality levels, but this triangular relationship explains close to 50% of the
variation in the recent decades.Another definition that is used to describe income inequality paints a
contradictory picture and refers to developments on an intra country basis, rather than at a global level. On
these terms, over the last quarter-century, there has been an increase in inequality in a majority of nations
including China, the US, Russia, the UK and most of Europe. In summary, by and large there has been an
increase in national inequality levels, but if we aggregate populations from all countries, global inequality has
slightly declined.
In practice, how do economists measure income inequality? And are there inherent difficulties arising
from the quality of data?
There are two main methods employed to measure inequality, each with its own advantages and limitations.
The first measures inequality using household survey data and the second looks at income concentration
using filed tax returns. Household surveys are used to get information on income levels from a sample of
households, surveyed at regular intervals. These are produced by most countries. However, in some countries
such as India and Indonesia, income surveys are not available and consumption surveys are used instead.
These national surveys are then combined and adjusted for differences in purchasing power and prices
between the countries in order to get a real worldwide distribution of incomes.
The second method draws on a countrys fiscal or tax data, and focuses on income concentration at the very
top of the distribution. For many countries, large segments of the population do not submit tax returns, and
therefore capturing the entire distribution can be an impossible task. Fiscal data however are significantly more
accurate at measuring incomes at the top percentiles compared to household surveys because rich people
tend not to participate in surveys or underestimate their incomes. Obviously, the incentive to underestimate
incomes exists in fiscal data too since such information provides the basis for taxation, but experience shows
that, in rich countries at least, tax evasion is less of a problem among the rich than the sheer unwillingness to
bother with surveys. Tax data are available for some two dozen countries only and they cannot be used to
generate global statistics.
It is also important to remember that focusing just on the top earners does not provide a complete picture of
income inequality within a country. There are scenarios when there are income increases at the top and the
bottom, but declines in the middle, and while the results obtained from top income shares only would imply
further concentration of incomes, inequality measured by the Gini coefficient might register a decline. But over
the past 30 years, in the US and elsewhere in the rich world, both top income shares and overall Gini have
gone strongly up. So, the two methods come to the same result.
For rapidly developing countries, is higher income inequality a necessary consequence of growth?
Peak levels of
income inequality in
the UK were
reached around the
1870s, while in the
US it was in the
1920s.
From a historical perspective, there is evidence of a relationship between inequality and growth, drawing on
periods such as the industrial revolution in the UK and the US. Inequality significantly increased during these
growth phases. Peak levels of income inequality in the UK were reached around the 1870s, while in the US it
was in the 1920s. The Kuznets curve, formulated in the 1950s, is based on the hypothesis that as an economy
grows and industrialises, market forces at first drive increases in inequality, and after a certain income per
capita threshold is reached, inequality begins to fall. But the evidence has been mixed more recently. Although
the Kuznets theory has not been rejected completely, it is perhaps too simple to conclude that inequality is a
necessary condition that accompanies industrialisation. For sure, Chinas growth phase has broadly
conformed to this pattern as inequality has risen during the period over which real GDP per capita experienced
a sixteen-fold increase (between 1980 and 2012). However, during Koreas development phase, rapid growth
was accompanied by reductions in inequality. So too in Taiwan, which experienced land reform and equitable
privatization after Japanese occupation.
The direction of causality between income inequality and economic growth, as well as whether the sign is
positive or negative, continues to be one of the most hotly contested relationships in economics. The Kuznets
theory makes the case that the direction is from economic growth to the changes in inequality. But it is also
possible to look at the reverse relationship, how inequality influences economic growth.
In the 1990s in particular there have been numerous studies that have looked at this relationship; some
arguing that inequality has a positive impact on growth, while other found a negative influence. Classical
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economists would argue that there is a positive relationship, as those with higher incomes save more and
these savings finance investment which led to higher growth. At the other end of the spectrum, it is argued that
inequality increases pressures for redistribution because with higher inequality there are more poor people and
they have an incentive to vote for higher taxes simply because they gain more from social transfers than they
pay in taxes. If you then also believe that higher taxes are bad for growth, there is a relationship from higher
inequality to low growth. But neither of these approaches found strong empirical support and this type of
literature waned until very recently. But now I believe this type of research has just begun to explore new
options as a result of access to much larger pools of data, and economists understanding is becoming far
more nuanced than 15 or 20 years ago. Analysis today is no longer limited to looking at the relationship simply
between an overall inequality index like Gini and the growth rate, but at pin-pointing the variety of impacts that
inequality might have on different segments of the population, i.e. poor, middle class and rich. It is in my view a
much more promising way to look at the issue. It would also take us away from the inconclusive black-andwhite approach to inequality. For some things, and up to a certain point, inequality may be good. For other
things, and beyond a certain point, it may be bad.
What role does ageing demographics play in increasing inequality?
Demographics certainly plays an important part. In general, an ageing population means increasing demand
for social transfers that redistribute income from those who are employed to those receiving pensions
leading to a reduction in inequality. From an accounting perspective, unless this transfer is accompanied by an
increase in productivity, there is a reduction in growth. However, demographic shifts take place slowly and are
constantly offset by many other elements impacting the labour market. For example, in countries such as
Spain where unemployment levels are close to 25%, a return to higher employment would obviously increase
incomes and may reduce income inequality.
Have we reached levels of income inequality where societys tolerance level is being tested?
Increasing income inequality eventually leads to political pressures, but at present, I do think that peoples
concerns that it might lead to dramatic political changes are exaggerated. I do not foresee catastrophic events.
However, I believe that the current situation has led to two problems, which I call the tale of the two Ps. Both
elements can be found in all democracies, but have become more prominent and corrosive in recent years.
The first is plutocracy, some of whose features are present particularly in the US. The need for politicians to
fund future campaigns has been met by monies coming from special interests. These relationships have led to
the politicians being beholden to lobbies. As we know from Adam Smith, special interests are special because
they never have the interest of a community, but their own only, in mind. This however is not a new
phenomenon and was seen in the US even in the 1920s. It is just worse now.
A more
educated population
reduces the
premium that very
highly skilled
individuals receive
which creates a winwin proposition for
both growth and
inequality.
The second risk is greater populism, and this has manifested itself especially in relation to immigration policies
in Europe. The response by European countries has been emblematic of lower economic growth experienced
after the financial crisis. Post 2008, stagnant or declining incomes in most countries were not accompanied by
an even distribution of the loss. For example, Mediterranean countries such as Greece saw real incomes at
the top 1% experience minimal changes at a time when GDP decreased by 15%, and when the poor and the
middle classes lost even more. As a consequence, there has been a tendency for political systems to assuage
the middle class by using immigrants as a scapegoat. These are indeed difficult challenges faced by the
countries that are adjusting to a slower growth environment, and if they are unwilling or cannot go after some
of their own rich, they go after the immigrants. The US has been slightly different because it has a long history
of immigration, and despite the fact that there is an anti-immigrant movement there, it is not been as sharp as
the one in Europe.
Has greater transparency enabled by widespread access to the internet changed attitudes?
I'm not going to exaggerate the importance of smartphones in revolutions, but there are many examples where
technology has played a role in raising awareness of the extremes in inequality. The revolution that took place
in Tunisia was triggered by WikiLeaks, which reported on the spending habits and luxurious lifestyle of the now
deposed leader, Ben Ali. Even though people would have been aware of his extravagance, there is a
difference in impact from being told this as gossip to being discussed and reported all over the internet.
What are the solutions available to leaders of Western countries who may have been mandated by the
population to address inequality?
Unfortunately, I do not have a very strong or original answer to this question. For example, although more
widespread and better education is not a panacea, it is certainly a policy that boosts economic growth and
helps address income inequalities. A broader-based educational system equipping the population with a wider
set of skills creates a more productive and flexible labour market (this is, I know, somewhat of a clich but may
nevertheless be true). Also, a more educated population reduces the premium that very highly skilled
individuals receive which creates a win-win proposition for both growth and inequality. Taxation is another tool,
but its impact on growth is much more ambiguous. Implementing tax policy change is constrained by the fact
that capital is very mobile, and for a single country or even group of countries such as the OECD it is a difficult
task to accomplish single-handedly. This has been the underlying hurdle which has scuttled proposals for
worldwide taxation on capital or the Tobin tax levied on financial trading for example. Also, there has been an
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ongoing debate in the US on increasing the minimum wage. The US minimum wage in real terms is below the
level it was in the 1960s, whereas GDP per capita has increased by almost 2.5 times.
Countries and cities that are highly specialised in specific industries can witness large differences in
incomes across the population. Is wider income inequality inevitable under these circumstances?
I agree that there are many economies located across the globe that are highly geared to a specific sector and
have been especially successful in attracting global talent. For example, the state of California ranks as one of
the most unequal states in the US, but it is incredibly successful at bringing together highly educated
individuals, as well as people from different portions of the income spectrum including low-skilled. I do believe
that high inequality in technologically driven or other successful economies is acceptable to the extent that it
allows for movements up and down the income ladder, within and across generations. But absent that high
mobility, high inequality which carries over several generations, eventually leads to marked inequalities of
opportunity and that is certainly undesirable.
The Haves and the have nots: A brief and idiosyncratic history of global inequalities
(Courtesy: Prof. Branko Milanovic)
Globalisation in action
Power curves
Change in real income between 1988 and 2008 at various percentiles

of global income distribution (calculated in 2005 international dollars)
Lorenz curve for global income distributions; 1988 and 2008: The
cumulative distribution function of the empirical probability distribution of
wealth
80
Real PPP income change (in percent)
100
"China's middle
class"
70
80
60
50
60
40
30
40
20
"US lower
middle class"
10
20
2008
0
0
10
20
-10
30
40
50
60
70
80
90
1988
100
Percentile of global income distribution
0
0
10
20
30
40
50
60
70
80
90
Source: Branko Milanovic.
Regional imbalances
Where is the middle class?
Different countries/income classes in global income distribution, 2005
Population according to income of country where they live (2009)
100
Originally featured in issue 71 on income inequality (Fortnightly Thoughts: Unequal Income, unequal implications, March 27, 201
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Special Issue
Interview withVic Abate

About Vic Abate
Victor (Vic) Abate was named GEs Chief Technology Officer and Senior Vice President in September 2015. He leads GEs 50,000
engineers and scientists, and GE Global Research, where 3,700 people focus on the company's long-range technology needs. He
previously served as the President & CEO of Power Generation for GE Power & Water and President & CEO of GEs Renewable Energy
business. Prior to joining GE, he worked for Zurn Industries and Allied Signal and was responsible for mechanical drive technology and
new product development.
How does a big company like GE manage to stay innovative?
Were the only

company that still
has an industrial lab;
in fact, we have ten
research centers
and 140 labs all over
the world.
One thing that we strongly believe in is that its much easier to sell a good product than a bad one, and good
products often stem from great technology. This is why we have always pushed engineering talent to the front
seat of the company. Let me share a story with you which encapsulates this culture of putting technology and
science at the core of everything we do. When I took the CTO position at GE, my predecessor Mark Little, left
me a letter by Elihu Thomson of the Thomson-Houston Electric Company which merged with the Edison
General Electric Company to form GE in 1892. The letter was dated 1900 and was written by physicist Charles
Steinmetz, who fostered the development of alternating current, to discuss the launch of an electromagnetics
lab. This is what led to the formation of the GE research center back in 1900. So even back then, it was very
clear to the leadership that if the company was to launch a power grid, it is important to develop an
understanding of electromagnetics. Fast forward to now - were the only company that still has an industrial
lab; in fact, we have ten research centers and 140 labs all over the world.
Of these, a large chunk are scientific labs where we research domains like photonics and heat transfer that are
essential for us to be good at, in order to sell industrial products like pipes. Other labs are more focused on
applied sciences, for example looking at aerodynamics and how air flow through a jet engine can affect
performance. Finally, we have interdisciplinary, outcome-based labs focused on disruptive innovation.
How do you manage costs and risks of failure when thinking about innovation?
About half of the funding we have comes from the GE businesses we support and companies that use GEs
research center. This is an efficient way to spend on R&D, because individually, our businesses would have
had to spend US$10 mn each for in-house research of, say, a better combustion system. Through this model,
we work towards product innovation that we can then apply across the industrial space.
Also, theres a certain level of market risk and technology risk that all products face. Think of our jet engine
business for example. Being leaders in the domain, we dont face a very high market risk. But technology risk
forces us to keep innovating in order to maintain our lead in the market. And so, we develop ceramic matrix
composites and manufacture fibers with higher temperature capabilities which ultimately increase the
efficiency of engines and power equipment.
On the flip side, there are products with relatively low technology risk but high market risk. Think of the LED
business or our recently launched Current by GE business, which is centered on energy efficiency and
demand side management. The bigger risk that we face in these areas is the uncertainty around how the
market is likely to develop.
There are also cases where technology risk and market risk are both high, and it is often in these areas where
truly disruptive breakthroughs occur. This is why it is important for a company to look at the entire ecosystem
of their offerings; both products and industries that are adjacent to their offering and also trends that could
disrupt the industry. For example, we study the future of flight, the future of power, the future of LNG etc. in
order to identify the transformative trends that could reshape these businesses over the long term.
For a company to be innovative, it is important for it to have a holistic framework that tells it what it does well
and how its products fit into the broader ecosystem. It is also important for the company to look at possible
developments which can turn the industry upside down. Tesla for example has managed to take on three
sectors, autos, power and O&G, by working towards energy storage.
At GE too, the focus on ecosystems is high. We play in three core areas: energy, transportation and
healthcare; and we are present across the ecosystem for all three. Our energy business is what I call a
dinosaur to dining table proposition - dealing with the dinosaurs, or fossil fuel, that we get from the ground to
the point of use. Then there is our power business to convert the resource into electricity, which is followed by
our grid business to deliver the power to the world. And all of that finally feeds into our Current business which
lights the bulbs over dining tables. Further, we look at possible technologies that could disrupt some part of our
businesses, for example renewables in the energy space, and work to proactively develop a presence in those
segments too.
Given the breadth of areas that GE touches upon, how do you allocate capital and people?
It boils down to product management. For every key product line, we have a product manager who lies at the
intersection of technology, supply chain, and commercial aspects like market and competitor research. The
way we define success for a product is how differentiated it is versus competitors on factors like economics
and reliability. It is this success that dictates a big part of capital allocation decisions within businesses. We
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also look at the IRR and returns matrix to prioritize products for funding. Apart from this, there is CEO funding
wherein the global research centre looks at funding of products we arent already in.
We allocate about half the capital into our business segments and the other half goes towards advanced
technologies that transcend multiple areas. A robotic system along with sensors and software for example, can
have autonomous inspection capabilities that can be applied to inspect wind turbines, pipelines, off-shore oil
rigs etc. Again, spending once on the R&D of these technologies is much more efficient and comes with a
lower risk profile than having each business spend individually.
Do you think it is now possible to innovate faster versus before, and if yes, why?
Without a doubt. There are two big dimensions to speed. The first is interdisciplinary teams which are boosting
innovation speeds. Let me give you an analogy. If we think of different products and functions as alphabets,
historically R&D departments were structured in a manner that one looked at the vowels, another at the
consonants and someone else at the punctuations. But nobody could actually string a sentence together.
Interdisciplinary teams on the other hand are allowing logical aggregation of subsystems which creates an
outcome that moves us forward.
The second factor that shapes innovation speeds is technological evolution. Additive manufacturing for
example is still in its infancy and progress in the domain lies at the intersection of material science, physics,
machines, software and applications.
More broadly, innovation speeds are better when companies know what they are trying to do. We tend to do
more applied research, with clear accountability to make our businesses better, and so, techniques like fast
prototyping boost innovation speeds. At the other extreme, progress can take a long time in fundamental
science, as it is not clear what the research is aimed at and what the outcome is likely to be.
The secret sauce of innovation, its success and speed, however, is having the right leadership team. Being
nimble and aware of the status quo, how things are changing and the likely derivative impact of ongoing
change is critical.
Is there a cultural shift that is improving innovation speeds too?
Absolutely. Discovering the truth faster, or as some people put it, failing fast has become a key aspect of
outcome-focused innovation. The culture of organizations is increasingly centered on learning, via trying and
testing; it has a dramatically different cadence versus waiting to find everything before implementing a
program. We have found that declaring what you want and letting teams try to make it happen makes learning
much faster. Teams discover the hardest issues sooner, and we can address them by directing sufficient
resources towards the issues.
The results are supportive of this approach too; innovation around our HAgas turbine, for example, took half
the time it took for previous gas turbines. We are now using a similar approach in R&D around silicon carbide,
the new material that helps electronic equipment run more efficiently. Were already shipping prototypes into
the field, whereas historically, it would have taken at least two or three more years for it to happen. The culture
is moving towards using outcome-based metrics, declaring what is needed and holding people accountable for
it, while also understanding that things arent always going to work the way initially planned.
Can you talk about the split of researchers working on existing products versus breakthrough
technologies at GE?
There are 58,000 engineers across GE. Some of them work towards ensuring that we have the most
competitive and reliable products; they work towards constant speed and efficiency improvements and ensure
that we are able to deliver projects on time and in budget. Then, there are 3,000 or so who are PhDs and
scientists pushing hard to make our products better by teaming up with businesses and working on big swing
areas. For example in the wind energy domain, we have moved from making 77 meter long blades to 120
meters and the teams are now working on multi piece blades that are 200 meters. Because they team up with
the 2,000 engineers working in the wind business, the motivation levels of the entire unit goes up as
employees see a future they are working towards.
Is it easy to attract talent?
Having a global footprint provides us a real advantage on talent. We have thousands of people working at our
centers in India and China, and also have units in Brazil, Saudi etc.
What people want is to see what they develop get to the market, and so it helps that we have a reputation of
being one of the few companies that still engage in industrial research and applied innovation via fast
prototyping.
Another reason we are able to both attract and retain talent is that each of our research centers is a co-located
technical community. In Bangalore for instance there are 375 researchers from GEs GRC (global research
center). But, there are also several thousand employees working across divisions: in rail, power, aviation, grid
etc. So, employees have access to a technical community across the industrial ecosystem, which can be hard
to find elsewhere.
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What will define future industrial winners?
As industrial
companies morph
into digital, high-tech
industrial
companies, having a
grip on the latest
technologies like
these will become
essential to survive.
What really excites me is that we are playing a more aggressive role at the GRC and innovating around
everything from the way machines are controlled, to the materials that go into them. Connectivity and the
digital world opens up unlimited possibilities, both for improving the way we control existing assets and how
new machines are designed and made. I almost feel that the GRC should be called GDC or the global
disruption center, constantly pushing businesses to do better. And that is exactly what I am promoting - having
a mindset that looks for disruption and pushing the boundaries. In our Edge Lab for example, we are setting up
drones with sensors to scan objects which can then be 3-D printed as and when needed.
As industrial companies morph into digital, high-tech industrial companies, having a grip on the latest
technologies like these will become essential to survive. But, that in itself is not enough to remain relevant.
What will matter is a combination of technological expertise, market and product positioning and the ability to
reduce costs.
Originally featured in issue 103 on R&D (Fortnightly Thoughts: The Reasons & Drivers behind innovation, March 11, 2016)
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Interview withRodney Brooks

About Rodney Brooks
Rodney Brooks is the founder, chairman and CTO of Rethink Robotics. Previously, he co-founded iRobot in 1990, where he served
variously as CTO, Chairman and board member until 2011. He also served as a Professor of Robotics at MIT from 1984 to 2010 and was
the founding Director of the Institutes Computer Science and Artificial Intelligence Laboratory. He has been elected to the National
Academy of Engineering and as a Fellow of the American Academy of Arts and Sciences, the Association of Computing Machinery and the
Association for the Advancement of Artificial Intelligence, among others.
Baxter is an industrial robot built by Rethink Robotics and was introduced in September 2012. It is a 3-foot tall, two-armed robot with an
animated face that is designed to perform simple tasks on a production line.
What are the changes occurring in the industrial robotics space and why do you see an opportunity for
collaborative robots?
Industrial robots are very adept in situations that involve repetitive motions in a fixed co-ordinate system, but
they havent evolved much in the past 50 years. Back then those robots didnt have sensors and computers
connected to them, and today they still dont have built-in sensors so they are not very safe to be around.
Therefore, industrial robots need to be put in cage-like enclosures to keep them away from people during the
operating process.
Industrial
robots are very
adept in situations
that involve
repetitive motions in
a fixed co-ordinate
system, but they
havent evolved
much in the past 50
years.
Collaborative robots on the other hand use low-cost chips and sensors that enable them to impart a level of
intelligence which they use for basic perception and reasoning. They are safe to be around and so can be
employed in factories to work in close proximity with employees, instead of having a separate area dedicated
to them. Another important feature that distinguishes collaborative robots like Baxter is that ordinary people
can use these robots and teach them new, different tasks. They are extremely intuitive and flexible and
integrate seamlessly with other automation technologies. They are also relatively affordable and do not require
specialists to operate them on a routine basis, and this is what makes them useful, particularly in smaller
manufacturing facilities where processes and requirements change on a day to day basis.
What is driving the improvement in economics for collaborative robots?
Improvements in capability and a persistent reduction in the cost of hardware technologies, thanks to the
smartphone revolution, have driven a lot of progress in the field of collaborative robots. Rapid growth for
electronics in the last 20 years has helped bring down the cost of cameras, sensors, accelerometers and other
related technologies, and this has enabled the cost of collaborative robots to come down, because these
robots use processors and sensors that are the same as the ones embedded in smartphones and other
electronic goods.
The other important development of course has been the increasing role of software in robotics; software
reduces the time and cost of installing, maintaining and modifying robots. It also makes the robot more flexible,
enabling it to impart an intuitive user interface and helps the robot improve over time, thanks to regular
updates.
The latest upgrade of the software that powers Baxter, for instance, helps users to re-deploy the robot quicker
and more easily, after common plant-floor variations occur, such as tables being bumped, fixtures being
moved etc. These individual upgrades arent necessarily breakthrough, but they matter a lot to the improving
capability of robots.
What kind of end-markets are you targeting for Baxter?
Currently, only about 10%, according to the Boston Consulting Group, of manufacturing facilities and factories
employ any sort of industrial robots and they tend to be very high end; these are not the areas that hold a lot of
potential for collaborative robots. Baxter is not going to compete in sectors where industrial robots make sense
because they are already partitioned into distinct human and robot areas. Collaborative robots wont disrupt
industrial robots used in automotive manufacturing for instance. What we aim for instead is to help put robots
in places where automation was previously not possible the incredible range of simple activities that current
robots are just not economical for.
Unlike traditional robots, which tend to be very expensive, particularly when we consider the programming,
installation and integration costs, collaborative robots like Baxter are a lot cheaper to deploy. If we compare
their cost and output against that of employing human labour in the US for instance, it takes less than a year to
recoup investment. Further, these robots do not require specialized engineers to integrate them for carrying
out a single task and can be reprogrammed easily, which helps maximize ROI as the same robot can be
utilized across multiple lines in a plant. This is why these robots make an ideal fit for small manufacturers with
limited budgets, space and staff.
What are the constraints that have hindered greater adoption of collaborative robots so far?
Collaborative robots are still quite new as a category and the lack of understanding of what they do, how to
use them and how they differ from other industrial robots has been one of the key bottlenecks that we have
faced. It took us a while to get people to understand how these robots work and why mapping their capabilities
with existing industrial robots doesnt work. But adoption is now picking up.
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We have also improved the software inside our robots dramatically in recent months. For Baxter for instance,
upgrades from last July have made the robot even more capable and productive than it used to be. It is able to
do the kind of tasks that people want it to do more and more and that should help boost penetration further.
We are continually expanding the capabilities of the robot and I think we will see demand get way out in front
of our supply this year as we ramp up production.
How do you see software usage in collaborative robots evolving?
It is software that adds new capabilities to the robot. And so, with Baxter we are aiming to merge our software
programs into one package and make it open to third-party developers, at every level, in 2016. This will allow
lots of people to build new capabilities for the robot, which could then be sold by third parties or remain in an
open source format.
Hundreds of people are already developing software for Baxter in universities. And while all of the new
developments may not be useful to our broader customer base, there will surely be some good ideas that will
emerge as so many different smart people work on improving the capabilities of the robot.
What is the competitive intensity like in this category of robots?
While collaborative robots did not exist as a category until as recently as a year and a half ago, the big four
robot manufacturers, i.e. Fanuc and Yaskawa from Japan and Kuka and ABB from Europe, and smaller
companies like Universal Robots, have all already offered or are in the process of developing some sort of
collaborative robot or the other. Some of them are making advances, but currently they are at a much higher
cost compared to Baxter. We also have a lot of patent protection, which will make it difficult for other players to
do exactly what we're doing. But we are glad that big companies are foraying into this domain. It not only
validates us and what we do, but also opens up more possibilities for the field of collaborative robots.
In which segments and geographies are your customers concentrated?
Our customers come from a variety of sectors, from small plastics manufacturers to third-party logistics. Areas
like machine tending (putting sheet metal in press brakes), which is both boring and dangerous in nature, also
represents a growing market for us and we believe robots can be perfect substitutes for risky and dull jobs like
these that people are not keen on doing.
From a 30- to
50-year perspective,
I do believe there is
a gross
overestimation of the
capabilities of
artificial intelligence
which is leading to
worries and
doomsday
scenarios.
Apart from this, I believe that elderly care will be one of the biggest drivers of robotics over the next 30 years.
The demographic inversion in Japan, North America, Europe, Australia and even China simply necessitates
greater adoption of collaborative robots. Now, while Baxter has some capabilities that the previous robots did
not have, it is still not in the perfect form needed for elderly care. And this is why it is great that Baxter is being
used in universities and that a lot of people are trying to work towards developing elder care applications with
Baxter.
In terms of geography, we are mostly located in the US and Canada currently, but we plan to expand
internationally later this year. But production should still be limited to the US, where we design and build Baxter
today simply because while designing the robot, we worked alongside 19 different custom parts suppliers to
figure out where their low-cost sweet spot was to optimize Baxters production, and fed that information into
the design process. And they are all in the US and Canada. I dont think we could have done that in China
without going through an extremely long and expensive process and even if we did, I dont think we could have
built our robots as cheaply in China as we build them here in the US.
You've refuted the concerns around the potential dangers of artificial intelligence and negative impact
on jobs...
Yes. Things like deep learning have made significant progress in the last five years; very surprising progress,
and this has made many outsiders to the field overestimate the capabilities of the computer programs that are
now able to do some of the things that human beings do. But while programs can now label images based on
their content, for instance, they do not understand what the image really means. So, if a collection of randomly
organized pictures of a dolls parts are fed into a computer program, it might just label the image as a doll
without understanding the concept of a doll. A person, on the other hand, will be able to say that the image is
not that of a doll, but a collection of doll parts. So I believe people outside the field over-generalize the
capabilities of what turn out to be very commercially useful programs, but where the adjacencies don't
generalize in the same way they would if a person was doing that task.
It is extremely hard to assert what the capabilities of artificial intelligence will be like 100 years from now, but
from a 30- to 50-year perspective, I do believe there is a gross overestimation of the capabilities of artificial
intelligence which is leading to worries and doomsday scenarios. Also, while there will be some disruptions in
the labor markets as artificial intelligence becomes more capable, that has always been the case with
technological progress. Overall, the progress being made in this field is likely to help people do their jobs better
rather than replacing them completely.
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How accommodative are regulations for collaborative robots?

The current industrial robots are not safe to be deployed in proximity to humans and the safety standards
established for them do a good job at maintaining distance. But a robot like Baxter does not need to be
separated from people on the factory floor. And this is what we are trying to explain to all the standard setting
bodies in this field. It has been easier to do that in some geographies and harder in others.
There are also many incumbents, especially in the safety industry, which are trying to invoke regulation on
safety grounds, but again, this isnt the first time that innovation is faced with regulatory hurdles. Historically,
train companies tried to use regulations to stop people from using automobiles in Great Britain in the 19th
century, and we are seeing similar oppositions being hurled at Uber currently. So, like many other innovations,
there will be a process involved and it will take some time to straighten regulations for collaborative robots, but
eventually, I dont think regulation will stand against progress being made in the field.
How do you feel about the prospects of innovation more broadly?
Some of the biggest problems in the world require a little longer-term development of not just the software but
also the hardware coupled with it. And so, while a lot of software-based platforms have seen valuations rocket
and in turn led to a situation where many VCs are focused on shorter-term hits, we need longer-term
investments to come up with genuine innovations that can help solve the worlds constraints.
Originally featured in issue 85 on artificial intelligence (Fortnightly Thoughts: The real consequences of artificial intelligence, February 18,
2015)
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Interview withRory Sutherland

About Rory Sutherland
Rory Sutherland is the Vice-Chairman and Executive Creative Director of advertising and media company Ogilvy Group. Rory helped found
OgilvyOne, the group's dedicated digital and direct agency, and he remains an advocate of so-called '360 Degree Branding' ensuring
brands have a coherent, joined-up presence in all relevant media areas.
Do you think aspirations and needs have changed for todays young consumers versus previous
generations?
All fashion, tastes and notions of status can change quite dramatically over time. Pepper on the table was
once a great signifier of wealth. Conventional "brown" Antique furniture, to give a more recent example, has
lost cachet: people in their thirties may now consider buying their own furniture to be a better badge of status
to having inherited it. Similarly, while owning a car was an obsession for people aged 17-25 about 30 years
ago, it is markedly less of a status symbol for many of the urban young of London or New York today.
Yet its dangerous to generalise: a product which is treated as a utility in one setting can be treated as a
positional good in another and vice versa. It is overly simplistic to extrapolate a London trend to the rest of the
urbanised world, where car ownership still remains one of the highest aspirations for almost everyone. For
many millions of young people, perhaps the highest material aspiration is a moped. Yes, in developed cities,
adoption of car sharing, car clubs and collaborative consumption are definitely on the rise, but it is risky to
extrapolate from one place to another.
But there are some common trends. One thing that has diminished is the self-imposed limitation of social
class: the kind of sentence you might have heard in the 1950s, such as people like us dont drink wine, is
much less prevalent nowadays.
How do todays young consumers perceive brands?
Young people are less conservative and more experimental in their brand choices than their elders. This is
partly through temperament, and partly because it pays more to experiment earlier in life (later in life, you know
your own tastes better, or at least believe that you do). Its also known that the psychological property of
"openness" - sometimes described as one of the "big five" measures of personality - declines with age, the
only one of the five known consistently to change through the course of life.
But it can be a mistake to see young people as all that individualistic. They may seem highly individualistic to
their parents, because young people are completely uninterested in copying their parents. They are, however,
almost pathologically obsessed with copying each other.
This can mean that brand preferences among young people are extremely volatile. Brewers have long noticed
how sales of a beer brand can surge or plummet very rapidly at any individual youth pub. Some new
fashionable import brand is adopted by one or two influential people and the rest of the drinkers rapidly follow
suit.
The same thing is seen in their affiliation to social networking platforms. Loyalty to WhatsApp, say, can surge
and fall with surprising speed.
Its very common to suggest that the young are brand immune. Quite the opposite. There is a certain amount
of self-conscious avoidance of mainstream brands, but this is hard to distinguish from elite consumerism. The
twin (and often highly contradictory) drivers of young people's behaviour are the need to stand out and the
need to fit in. Brands play a vital role in both.
Moreover, brands are typically more important to those with less disposable income. The reason for this is
fairly simple. Famous brands are not always better, but they are much less likely to be bad. A manufacturer
with a valuable and expensively-built reputation at stake has more to lose by selling a bad product than
someone with little reputation. People with less spare money cannot take the risk of buying bad products, and
so buy brands as a form of insurance against disappointment. Brand reputation is a form of consumer
protection.
Owning a brand is therefore a double-edged sword. You can charge a premium for reassurance for as long as
you do not disappoint. But you are extremely vulnerable to reputational damage and that risk is accentuated in
the social media age, where networks amplify bad reports far more than before.
Not only are disgruntled customers more likely to leave comments than happy ones, even readers tend to
attach a greater weighting to negative reviews. It is also harder for brand owners to hide behind a faade. The
tax avoidance of the parent company, for instance, will be connected to the brand, even if the two operate
under different names.
What role do social media and peer reviews play in shaping the consumption habits of young
consumers?
There are at least two things at work here. First, patterns of consumption may change because experiences
which were once enjoyed privately can now become public displays. Secondly, peer review and other ratings
systems may have very strong effects in some sectors. At best they may grow consumer confidence by
reducing the information asymmetry which traditionally limited a sectors overall trustworthiness.
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For instance I might suggest that it might be worth predicting growth in the hotel sector because it is much
easier confidently to book a hotel five hundred miles away today than it was in 1990. The ability to read the
experiences of others is good news for good hotels and very bad news for bad hotels.
By allowing people to share experiences like eating out and going on a vacation, social media may turn what
were once personal experiences into positional goods, and may hence displace the appeal of some physical
goods. This in turn might change the way people vie for relative status. Leisure, for instance, has a certain
status value attached to it now, as its much easier to share photographs of your bungee-jumping holiday in
Queenstown with a thousand friends. Interesting hobbies have a greater status value for similar reasons.
Apart from this, by reducing information asymmetry and making it possible for people to trust previously
unknown vendors, new media channels can make possible business transactions which would have been
impossible previously. By maintaining a reputational feedback mechanism which makes it possible for
dissatisfied consumers to retaliate against bad vendors, eBay for example has unlocked tremendous economic
value.
Some authors suggest that ratings systems are a replacement for advertising in that they achieve the same
effect, buyer confidence, more effectively and at lower cost. In some areas of business this may be true.
Nevertheless, social referrals and peer reviews are often more about signalling than reliable product
information, and consumers do not always take reviews at face value. Secondly, even for high-ticket
categories like cars, peer reviews are still not the dominant influencing factor for purchasing decisions. People
will seek out reviews of family-run restaurants but very few people check reviews before visiting McDonalds.
My final point on the influence of digital media, including growing smartphone use, is that it may have
unanticipated psychological effects on our offline behaviour. One possible effect is to create a culture of instant
gratification and reduced patience levels among the Gen Y consumers who have grown up with it.
Unlike my children, I do remember modem noise. I also remember what life was like before the digital age.
Mostly I think technology makes things better, but I am also conscious of certain things we have lost, the clear
division between work time and leisure time, for example. One problem Gen-Y faces is that it has absolutely
no analogue frame of reference: digital life is all they know.
Economic circumstances and the environment in which they grew up must also be critical in shaping
millennials behaviour.
Absolutely. Habits like food and drink preferences, or the relative weight of expenditure on different forms of
consumption, are often established in a persons youth and carry through to a surprising extent through later
life.
Many countries have one dominant form of spicy food - Mexican in the US, Indian in the UK. People have
suggested that this is effectively the food which people learned to eat during their college years which they
then stick with.
Im still surprised at the incredibly low level of dishwasher ownership in the UK (lower than Turkey). Again this
may be a cohort effect - many people grew up in a period where washing machines were seen as essential but
dishwashers a luxury. They have never really recalibrated this view.
Peoples behaviour can be shaped disproportionately by the economic circumstances which prevailed in their
youth. Millennials dont have dramatically different personalities to other generations, but both the cultural and
economic circumstances that they face today are different, and often, their behaviour is just a natural response
to these circumstances. These behaviours may be surprisingly sticky.
What other factors influence consumer behaviour?
Simple things can trigger changes in consumer behaviour. A move to a new city, for instance, is often
accompanied by an increase in luxury goods expenditure as people try to establish their social status in a
setting where they are unknown. Gender ratio can also impact consumption. The propensity of men to buy
positional or status goods tends to go up if theres a surplus of men in a region. An oil boom is typical of that
situation. As one social scientist observed, there is a reason why Neiman Marcus launched in Dallas and not
Boston. (China has both rapid urbanisation and gender imbalance, interestingly).
But I think theres the prospect of a significant revolution in the efficacy of marketing. Recent advances in fields
such as behavioural economics, psychology and other social sciences hold the promise of significantly
improving our understanding of how people come to trust, choose and act. Conventional market research and
standard economic theory are both limited and sometimes downright misleading guides to real-world market
behaviour. Most purchases are made, to a great extent, by what Daniel Kahneman calls the brains system
one, which has a logic all of its own. Once this is better understood a lot of misguided effort in marketing and
new product development can be avoided.
How does the evolution of status symbols impact society?
Conventional economic logic (which considers only individual utility) cannot capture why people spend
extravagantly and sometimes irresponsibly on high-end brands that in many cases are not technically or
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functionally much better than mainstream options. Is caviar truly all that nice? Status competition for Veblen
goods and for scarcity value does not follow sensible rules, and at worst causes resources to be used in ways
which are useless or even environmentally damaging. (Rhino horn, anyone?)
As Peter Thiel
says in Zero to One,
we asked for flying
cars and what we
got was 140
characters.
But while it is easy to disparage status seeking, many innovations that have improved the quality of life have
emerged from status seeking activities. Everything from cars to refrigerators and microwave ovens (caves,
axes, etc.) were considered status symbols, before they were ultimately democratised by the power of
markets. And so, its fair to say that the innate human urge to compete and seek a higher status has actually
benefitted society and improved the general standard of living. At least sometimes.
However, what worries me now is that unlike 1850-1950, a lot of competition lately has been focused on areas
which may provide a temporary status boost but which dont necessarily parlay into real improvements in
quality of life. The expenditure on fashion and beauty products (US$1.7 tn per year) is kind of terrifying. As
Peter Thiel says in Zero to One, we asked for flying cars and what we got was 140 characters. Quite a lot of
competition now seems focused on, to quote one mans description of the fashion industry, innovation
without improvement.
Are young consumers more inclined towards experiences versus owning things?
The distinction between owning things and spending on experiences is actually quite blurry. Its hard to say if
the act of buying a saxophone, for instance, is a quest for possession or experience.
It does seem obvious to me though, that many people would probably like to make a more flexible trade-off
between leisure and earnings than they are currently able to do. In conventional economic theory, this is a
simple matter of working as long as the marginal gains from loss of leisure are worthwhile. In reality, however,
few people have any freedom to make a trade-off. Americans, for some bizarre reason, regard it as lazy for
Europeans to take four weeks holiday - proof of the power of norms.
Retirement also seems more about convention than any obvious good. Why is leisure only virtuous
when you are old?
Studies also
show that unlike
money, which is a
positional good,
experiences and
leisure are absolute
goods.
Studies also show that unlike money, which is a positional good, experiences and leisure are absolute goods.
In an experiment when people were asked if they would rather live in a world where they earned US$100,000
a year and their colleagues earned US$120,000 a year or a world where they earned US$70,000 a year while
everyone else made US$50,000, most people chose the latter option because despite making them materially
worse off, it made them richer in relative terms. In contrast, when presented with similar choices regarding
leisure and holidays (having four weeks off a year, when everyone else gets three, or having three weeks off
when everyone else gets two), a majority choose the first condition.
Further, incremental happiness gained from an increase in income generally tails off beyond a certain point.
Happiness also varies depending on where money is being spent. So while philanthropy and spending time
with friends genuinely makes people happier, the happiness gained by buying a better house or property fades
away much quicker.
It is possible that these discoveries from happynomics may chime with Gen Y consumers, and cause them to
seek greater leisure, especially if asset-price inflation makes home-ownership something long-delayed if not
impossible.
Big-ticket expenditure might shift to other areas, such as holidays or alternative accommodation. But these
larger shifts in behaviour are fearsomely difficult to predict.
Do you think that as with music and newspapers, many more things will be expected to be free as they
move into the digital world?
The mistake that the music industry made with online channels was that of cutting off its nose to spite its face.
By making it extremely hard for music to be downloaded legally for money, they pushed people towards illegal
consumption not so much through stinginess as necessity. Australia is a hotbed of music and film piracy today
and its not because people wanted to avoid paying for media, but because films are perversely often released
much later in Australia than in the Northern hemisphere.
Further, once the expectation is set for something to be free, its extremely hard to charge for it. (This is the
anchoring effect, in behavioural economics terminology). This is why very few newspapers today can afford
to charge for access to their online content. This lesson of not giving away things for free has persuaded most
media companies to charge separately for tablet access, something that has proved to be a boon.
In fact, the amount that people are willing to pay for something is seldom simply a function of the products
utility, but is muddied by other psychological factors. Take e-books for example. There are cases where people
pay a premium for an electronic book, versus a hard copy, or certainly not much less. Instant gratification
seems to be a powerful force. This wouldnt have been possible if like music, books had been free, or if the
price anchor from paper books had been different.
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Economic theory is psychologically naive. Making products cheaper to attract customers is not as effective as
economics assumes (interestingly, when you think about it, few people derive much pleasure from their
consumer surplus).
The companies which will most succeed in the future are those who best understand customer psychology.
And if you only understand them in narrow economic terms, you really understand them very badly. Homo
economicus has never been spotted in the wild.
Obsessing over cost cutting is rarely a good strategy for businesses to follow; youre effectively targeting a
species of customer which doesnt really exist. In fact, excessive focus on cost control can damage wealth
creation both for consumers and investors. Look at UK mobile phone networks for instance. In the drive to
bring prices down, what regulators essentially created was a race to the bottom, in which both companies and
consumers suffered in terms of poor returns and service quality respectively.
On the other hand, establishing yourself as a mental monopoly is a more resilient strategy and this is exactly
what the greatest brands have always done, and what companies like Amazon and Ocado are striving to
achieve. This means much more than simple price reduction. The best companies are masters of consumer
psychology. Amazon Prime, for instance, not only takes away the cost of paying for delivery each time, it
creates a small sense of reward every time a Prime member benefits from the saving.
The really big business questions are not technological, theyre psychological.
Now currently, for categories which can more or less be sold online, i.e., everything apart from fuel, lumber,
large objects, perishables and groceries, Amazons market share is just 1% of total US retail sales. This is, I
think youll agree, surprisingly tiny. Why? Is it a cohort effect (like dishwashers)? If so, the potential for
Amazon to grow is truly immense, if it is able to position itself as the default marketplace for young people and
they stick with their online habits as they grow up into more important purchasers. Or is there some other
psychological obstacle which, unless we can invent a way to circumvent it, will always maintain online retail as
a niche? We need to find out.
Originally featured in issue 81 on young consumers (Fortnightly Thoughts: How the young are shaping future consumption, October 23,
2014)
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Interview withSir Partha Dasgupta

About Sir Partha Dasgupta
Professor Sir Partha Dasgupta is the Frank Ramsey Professor Emeritus of Economics at the University of Cambridge. He was named
Knight Bachelor 2002 for services to economics. His research interests have covered welfare and development economics, the economics
of technological change, population, environmental and resource economics, the theory of games, the economics of undernutrition, and the
economics of social capital. He has won many awards including the 2002 Volvo Environment Prize, the 2004 Kenneth E. Boulding
Memorial Award of the International Society for Ecological Economics and the 2015 Blue Planet Prize for Scientific Research.
What motivates people to have children?
There are two motivations for having children; children are both ends and means. Universally across all countries,
there is an innate desire to have children; parents will tell you that children add meaning to their lives. In that sense,
children are the ends. In rich countries, it may not be as clear how children act as means. But in poorer countries,
children also serve as the means by substituting for capital assets, especially in countries that lack strong economic
institutions. Children act as security during old age when the welfare state or savings facilities are inadequate. These
theories are testable and have good empirical support, for example, researchers have used regression analysis and
found that missing institutions cause parents to have more children. Children also substitute for producer goods; in
rural communities in poor countries children often start working from the age of six or seven. They help with a variety
of household tasks, from working on the farm, to fetching wood and cooking. In fact, children play such a crucial role
that John Caldwell, the anthropologist, has gone as far as saying that in present discounted value terms, transfer of
resources in rich countries is from parents to children over their life cycle, but in poor countries its from children to
parents.
There are two

motivations for
having children;
children are both
ends and means.
Why have fertility rates declined in many parts of the world?

With economic development, children are seen less as means and more as ends, and this exerts downwards
pressure on family size. The way I think about it is that even the poorest households run some sorts of calculations
when deciding how many children to have. In developing countries, that will be influenced by the institutional structure
and child labour requirements as I mentioned, but also by a multitude of other factors including mortality rates, access
to health care and family planning services, educational access, social norms and work opportunities, especially for
women. Considering changes in each of these factors helps explain why fertility rates have declined.
Yet none of these factors alone provide definitive explanations for the changes weve seen across countries, instead
they need to be seen together. For example, through increasing the opportunity cost of womens time, researchers
have argued that female education and employment have driven fertility declines. So when the World Bank reported
in 2012 that the proportion of people who had completed primary education in Bangladesh, India, and Pakistan, were
65%, 96%, and 67%, we might have expected fertility rates to be highest in Bangladesh and lowest in India. Yet the
total fertility rates in those three countries were, however, 2.2, 2.6, and 3.4 respectively. No doubt that's a sample of
only three, but together they account for about 24% of the world's population, so their statistics matter. It seems to me
that Bangladesh's remarkable performance in bringing down fertility has been influenced enormously by the large
contingent of NGOs there that have worked with rural communities and promoted contraception use and womens
employment. So persuasion and engagement are also important factors.
In most other
parts of the world,
fertility has come
down not because of
population policy but
because people
have responded to
their own changing
requirements;
children are seen
less as means and
more as ends.
Social norms can explain why fertility rates have stayed stubbornly high in some parts of the world. Humans have a
tendency to conform; a couples fertility decision is influenced by the fertility decisions of their neighbours and peer
group. So, historically fertility rates in places like Niger were high owing to infant mortality, but even as infant mortality
has fallen, fertility has not, and remains close to 8. One reason that these communities are locked into a selfsustaining high total fertility rate is that no one family on its own has an interest in reducing its fertility rate, when
others arent. Each family fears that if they are the first to break the social norm of larger families, their non-conformist
behaviour will result in them being stigmatised.
The question then is, how do you break out of high fertility equilibria? I suggested in my 1993 book, An Enquiry into
Well-Being and Destitution that access to TV in rural communities was a good thing because it exposed residents to
behaviour outside of their neighbourhoods, where fertility was likely to be lower. We have seen evidence of this in
Latin America and India already, and improving internet access and smartphone penetration in Africa may have the
same effect. In India, cable TV was introduced at different times in different states through the 1980s, and quite
remarkably drops in fertility correlated with the respective introduction dates.
In which countries have policies played an important role in reducing fertility rates?
My sense is that in almost all countries barring China, governments shy away from the question and development
economists and activists avoid the subject like the plague. Whilst the one child policy was undoubtedly draconian,
demographers reckon it prevented about 400 million births and coincided with a period of significant Chinese
development. But in most other parts of the world, fertility has come down not because of population policy but
because people have responded to their own changing requirements; children are seen less as means and more as
ends. State involvement in population planning has been limited partly because the idea of government intervening in
a decision as personal as childbearing is met with resistance. But fertility decisions have never been personal, they
have always been influenced by society at large. The large negative externalities from population growth on natural
resources and the environment clearly have social impacts. Demographers express satisfaction that the growth rate
of world population is declining, but a population of 10/11 billion consuming at the average level in a middle income
country at a sustainable rate would require two earths. Nature does not respond to percentages, she only recognises
absolute magnitudes. Its for those reasons I dont fully believe in reproductive rights any more. A right implies a zone
of control which nobody else has any say in, but if the exercise of those rights harms other people in an unaccounted
way, then the notion of rights actually loses its force.
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Do the rise of labour-replacing technologies reduce the need for children?

Certainly. I think this has been an extremely unthought-out area on the part of policy makers in the west. Policy
makers talk about the detrimental impacts of ageing societies, the economic need for immigration and the need to
implement fertility boosting policies, but technological advances have meant that for a given level of output, our labour
requirements are lower. Of course for this to be reflected in policy, more work needs to be done on how labour
requirements will change in the future based on estimates of technological advancement. Nonetheless, these
advancements will not only have profound implications for the labour force, but ageing societies should also enable
us to live more sustainably and alleviate pressures on earths natural capital.
And what is the relationship between GDP per capita and population?
To give some historical context, from the year zero to around 1600, both population and GDP per capita were largely
stagnant. This aligned with Malthus writings; he stipulated that available land could only feed a fixed number of
people, and argued that in the long run both population growth and consumption per capita growth would tend to
zero. But Malthus theory has been disproved by humankinds spectacular success since then, both average GDP per
capita and population have increased dramatically. Global GDP per capita increased from US$615 (1990
international dollars) in 1700 to US$5,010 by 1998. Population grew from 600 million to over 6 billion over the same
time period.
But one reason why significant population growth and GDP per capita growth have been able to co-exist is that weve
extracted resources, earths natural capital, at an unprecedented rate. Most of these resources have been underpriced, resulting in over-exploitation. Its misleading to think that GDP per capita and population have both grown
without incurring accompanying costs. One of the problems surrounding national accounts is that they fail to consider
a very large class of capital assets, that being nature. Countries have inventories of buildings, roads and other
physical capital but no attention is paid to natural capital. Can you imagine a firm not knowing what assets it owns?
So, in my mind, what emerges is a picture of institutional failure at both a country level and a global level. At a country
level the lack of reliable institutions such as pension schemes has forced parents into having more children than they
would otherwise have and that increases strains on earths natural capital. At the same time, there exists no global
strategy on managing the earths resources and properly pricing them; the atmosphere and deep oceans being
obvious examples. So when Im told that humankind has never had it so good, I agree, but we have to ask ourselves
whether it has come at the expense of future generations. Simply looking at GDP per capita growth and population
growth and inferring that there are no trade-offs between the two is misleading, because we fail to assign a value to
declining stocks of natural capital.
Wont younger societies in emerging markets put more of a strain on the earths natural capital?
That is premised on emerging markets growing their consumption to developed market levels. Increasingly I find
myself thinking that EMs dont need to grow their consumption per capita to developed market levels, and developed
markets could in fact cut their consumption per capita and still live happily but crucially more sustainably. Twenty
years ago, developed countries were neither happier nor unhappier than they are today, despite lower consumption
per capita. But any Head of State that advocated cutting consumption per capita levels would be ousted immediately.
I think one reason governments prioritise increasing consumption is that they believe its tied up with employment.
And its absolutely right for governments to care about employment. Unemployment is a great evil. So governments
prefer the virtuous cycle of higher consumption and demand, higher employment and output, which ultimately leads to
higher consumption; as opposed to the vicious cycle which brings lower consumption, lower employment and lower
output. We are encouraged in the west to believe that by consuming at a higher rate we contribute to the social good.
But there doesnt have to be a binary choice between the virtuous and vicious cycle. That requires economists to
think of ways to decouple consumption from full employment; where we can have a world where employment is not
jeopardised but consumption and output are tempered so that we are able to live sustainably.
What happens to fertility in the aftermath of natural disasters?

Thats an interesting question, and especially because its likely that climate change will increase the frequency of
these events. If that is the case, then we might expect families to reduce their number of children because the future
has become bleaker.
That said, recent empirical evidence from developing countries does not support this notion. In the aftermath of
flooding and typhoons in Bangladesh in the 1970s, the fertility rate picked up to replenish the stock of children. That
suggests that providing children still act as means in many parts of the world, even if the future is bleaker, high fertility
rates will remain. Because these families are living in extreme poverty today, they heavily discount the future and it
doesnt affect their childbearing decisions.
Originally featured in issue 98 on fertility rates (Fortnightly Thoughts: Who shrunk the fertility rates?, December 11, 2015)
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Interview withDiane Coyle

About Diane Coyle
Diane Coyle (OBE) is the Managing Director of the economic consultancy Enlightenment Economics and Vice Chairman of the BBC Trust.
From 2001 to 2009, she served as a member of the Competition Commission in the UK. She was also the Economics editor for The
Independent (1993-2001) and European editor of Investors Chronicle (1989-1993). Diane completed a PhD in Economics from Harvard
and has also authored several books including her latest, GDP: A Brief but Affectionate History.
What does GDP measure and how has it evolved over time?
How the economy is measured has changed significantly over the centuries and has evolved along with
macroeconomic policy. The early origins of GDP date back to the 1929 Great Depression, where for the first
time, the US government was expected to intervene and provide support to the economy. This required a
clearer understanding of the impact of the recession and consequently national economic data was
aggregated. Shortly after the Second World War began, there was an even greater urgency to determine the
capacity of the economy. In an effort to maximise wartime production, it was necessary to calculate the
potential sacrifice that civilians would have to make to divert resources to the war effort. So, GDP was
originally a statistic designed to capture material production and manufacturing output of factory assembly
lines.
Since the 20th

century, the
composition of
modern economies
has significantly
changed and new
sectors are not
always captured well
in GDP figures.
[] GDP was
constructed in parallel
to the meteoric rise of
Keynesian
macroeconomic
theory and it will
require an equivalent
body of work to
replace it.
Since the 20th century, the composition of modern economies has significantly changed and new sectors are
not always captured well in GDP figures. At present, 70% of output from OECD member countries stems from
the service sector, intangible goods or from innovation. I believe there will come a time when a replacement
needs to be found, but we're not there yet. Unfortunately, the deep thinking required to understand in
aggregate the economy in the 21st century has yet to be accomplished. GDP was constructed in parallel to the
meteoric rise of Keynesian macroeconomic theory and it will require an equivalent body of work to replace it.
Nevertheless, GDP is still a useful benchmark to compare one country against another, as long as it is used
carefully and with an understanding of its limitations.
Which parts of the economy are not adequately reflected in GDP figures?
Economists have always struggled to determine the potential output of a country and measure the benefits to
consumers from goods that are not captured in market prices. Many services provided by governments fit the
criteria where there does not exist an equivalent price comparator in the private market. For instance,
teachers output is extremely hard to quantify - should they be assessed on the grades achieved by pupils, the
number of children processed or number of qualifications gained?
Similarly, it is also difficult to accurately capture in price indexes, and thus GDP, the increases in productivity
enabled by computers, which have simultaneously increased in quality and decreased in price. William
Nordhaus of Yale University has estimated that computer performance has improved productivity by a factor
between 1.7 tn and 76 tn times since the start of the 20th century. Hedonic price indices have been employed
in recent years that use econometric models to factor in the change in quality of products such as WiFi
capability, higher resolution displays, increased memory capacity with any remaining unexplainable changes in
price attributed as inflation.
The lags in accounting for technological change in calculating output are not new. For example, if you look at
the national income statistics of the UK for 1883, during the height of the Industrial Revolution, there was an
overwhelming level of detail and massive focus on agricultural production, illustrating that there has always
been a lag between economic reality and measurement. And so, as the digital segment of the economy
continues to grow larger, I expect the gap between the consumer benefits from innovation and the measured
market value of economic output to increase further.
Has the pace of innovation outstripped economists ability to calculate GDP in any meaningful way?
There have been previous examples of technology fundamentally altering the structure of an economy and I
believe we are in the middle of one of those historic periods. These episodes of structural change are common
in a capitalist economy, but what makes this time different is the types of jobs being substituted by automation.
A recent OECD report highlighted that increasingly, many reasonably skilled professions can be carried out
using robotic technology, and it will only be a matter of time before this technology becomes cost-effective.
Nonetheless, it is important to remember that GDP is very simply measuring what it has always measured and
that is economic activity at prices paid in the market. The tool has to be used for the purpose for which it was
designed and the common mistake made is interpreting it as something more meaningful. Thats like expecting
a carthorse to start winning races its just not going to happen!
For policy makers to both appreciate the importance of innovation and encourage it, and at the same time deal
with the disruption, requires GDP to be supplemented by other measures. The distribution of jobs, skills and
rewards will never be captured by looking at single aggregate figure, and there urgently needs to be a debate
on what set of indicators should supplement GDP in the policy debate.
39
Special Issue
What is your view on GDP revisions and what do they mean for investors and policy makers?
I believe investors need to resist assigning equal weight to GDP statistics from different countries. Although all
countries sign up to the same theoretical standards and definition of GDP, the degree of implementation varies
widely across countries. In particular, developing countries have far less expertise or resources available for
calculating the national accounts statistics accurately, and so they tend to update figures less frequently.
For example, Nigeria recalculated its GDP figures recently resulting in an upward revision of 89% in the level
of 2013 GDP. The economy has of course not fundamentally changed overnight, but the government updated
its base year for the calculation from 1990 to 2010. Unsurprisingly, the old set of figures had not captured the
change in the structure of Nigerias economy, especially the boom that had taken place in the telecoms
industry and the hugely successful film industry (Nollywood).
This process of rebasing is also carried out in the US and the UK and occurs approximately every five years
and so the changes are less dramatic. A similar exercise is being carried out in other African countries, where
in some cases the weights on different sectors of the economy have not been updated since 1968. In reality,
although it does not change the state of the economy, altering the methods of calculation can have profound
implications for assessing the pattern of growth over time and so interpreting the success or failure of policy
measures.
GDP, for
instance, counts
consumption and
investment equally
and therefore does
not take into account
the depletion of a
countrys assets. I
would have a
dashboard that is
decided by asking the
population what is
most important to
them.
Other examples of boosts in GDP figures include the US changing its accounting method to treat R&D
expenditures as investment rather than as previously treated as intermediate expenses. The ONS in the UK is
implementing similar methodological changes later this year, which are expected to increase GDP by 2.5%5%. It is important to remember that GDP is not the same as measuring the height of a mountain or any other
natural object; the economy that is being measured is composed by a set of definitions where the boundaries
are constantly moving. For these reasons, the quarterly GDP figures that are reported should, I believe, be
given far less weight. Nevertheless, over 3-5 years, GDP does provide a useful picture of the economy and
certainly, over the long term, it is a good tracker of economic growth.
Can technology be used to increase the quality of data and better capture informal segments of the
economy?
To an extent, the questions on relevance or adequacyy of GDP depend on what the figure is expected to
show. An investor interested in the ability of a country to repay its sovereign debt will be more interested in the
size of the formal economy. On the other hand, a marketer planning a project targeting consumers will want to
factor in the level of disposable income different people can spend and will look to include estimates of the size
of the informal sector.
There is definitely potential for new technologies and new methods to enhance the measurement of what
people are interested in. For example, electricity usage or frequency of terms searched on Google or real-time
price information can all become additional references to support GDP calculations. This information
advantage should not be underestimated. The original set of British national accounts developed by William
Petty in the late 17th century gave the country a real advantage in the wars against France, because at the
time the British monarch knew the level of tax burden the country could afford. During the Cold War the CIA
had in some ways better information on the Soviet economy than the Soviets themselves, which helped
President Ronald Reagan have the confidence to put political pressure on Mikhail Gorbachev.
Japan has experienced low GDP growth, but scores highly on a number of other key indicators. Do
you think that the West is too focused on growth?
There is certainly a headline GDP fixation in the media. But to assess peoples well-being, there needs to be a
focus beyond just GDP in per capita terms.
Viewing the Japanese economy through a dashboard of indicators helps illustrates why, despite Japans
sluggish GDP growth, it remains a successful and prosperous country. Indicators such as the quality of the
surrounding environment and access to local amenities are useful proxies for well-being. It should also be
noted that population growth in Japan has been static and therefore there is less of an imperative for higher
GDP growth, especially given that per capita GDP is already at a very high level. So I am certainly not
prescribing that other countries should give up their efforts to increase growth.
And the nature of growth itself is changing. For the West, a greater part of growth is now composed of
innovation than before. In other cases, you need to consider the trade-offs for focusing just on growth. For
example, in China, growth has come at the cost of the environment, it is evident by simply looking at the
skyline. Unfortunately, other trade-offs are less clear and when they are do not receive a sufficient level of
attention. For example, the ONS publishes an annual set of environmental accounts, but because it is a large
complicated book that has no easily digestible headline figure, it is mostly ignored. A step in the right direction
would involve publishing information on work-life balance, education, access to technology and amenities in a
more user friendly way.
40
Special Issue
If you were to design a dashboard of indicators to supplement GDP what would you include?
I believe a dashboard approach can be really fruitful and can help reframe the debate further towards the
desire for greater growth, but not at a cost to society. GDP, for instance, counts consumption and investment
equally and therefore does not take into account the depletion of a countrys assets. I would have a dashboard
that is decided by asking the population what is most important to them.
This approach has successfully been implemented by the Australian government and includes, for example,
environmental indicators which flash red even though GDP and unemployment are flashing green. As a result,
in the political debate, the tradeoffs are much clearer; people are more aware that they are eating into their
natural capital for greater immediate consumption. The more difficult and complicated part is to capture if
sufficient investment has been made in areas such as infrastructure or in the countrys education system.
In conjunction with this dashboard, I would ensure that there are easier visualisations or illustrations that made
all these concepts really clear, on a regular basis. Consequently, analysts and journalists could focus on the
bigger picture and not just on the one figure which is fixated on, every quarter.
Originally featured in issue 73 on GDP (Fortnightly Thoughts: GDP: Forecasters friend or foe, May 1, 2014)
41
Special Issue
Our list of issues

Issue
Date
Topic
108
July 21, 2016
DM Consumers
Can DM household spending growth pick up?
107
July 13, 2016
Gen-X
Why you need to know more about Gen-X
106
June 16, 2016
Buzzwords
21 Buzzwords How many do you know?
105
May 9, 2016
Disintermediation
Where are middlemen being disintermediated?
104
Apr 12, 2016
Consumer Behaviour
Understanding the behavioral revolution
Professor Dan Ariely of Duke University and Dr. Robert Cialdini of Arizona
State University
103
Mar 11, 2016
R&D
The Reasons & Drivers behind innovation
Vic Abate CTO of GE, Andy Teich CEO of FLIR and Prof. Linda Hill of Harvard
102
Feb 18, 2016
Mining investment cycle
The long, slow recovery for mining
Edward Chancellor, former member of the asset allocation team at GMO
101
Feb 1, 2016
Profit margins
Can global profitability remain high?
100
Dec 17, 2015
100 charts
99
Dec 17, 2015
Thematic Investing
What we think about when we think about themes
Prof. Michael Porter of HBS and Prof. Aswath Damodaran of NYU
98
Dec 11, 2015
Fertility
Who shrunk the fertility rates?
Prof. Sir Partha Dasgupta of Cambridge University
97
Nov 23, 2015
Capex hotspots
Where are the capex hotspots?
96
Oct 23, 2015
Cost to build a city
SimpliCity: What does it take to build a city
95
Sep 17, 2015
End of easy EM growth
Is the era of EM growth over for DM exporters?
94
Sep 24, 2015
Startups
Code makers and code breakers
93
Sep 2, 2015
People flows
FAQ: Where is everybody going?
92
Jul 7, 2015
Everything as a Service
Everything as a Service
91
July 7, 2015
Buzzwords
No more buzzword FOMO*
90
June 16 2015
Info asymmetry
FAQ: Why does shrinking information asymmetry matter?
89
May 21, 2015
Convenience
At your convenience
88
May 6, 2015
Capex
FAQ: Why isnt corporate capex higher?
87
April 6, 2015
China innovation
How innovative is China?
Gordon Orr of McKinsey Asia and Prof. Andrew Ng of Baidu
86
Mar 24, 2015
Scarcity
Scarcity in a sea of abundance
Peter Diamandis of XPRIZE and Matt Ridley, author of `The Rational Optimist'
85
Feb 18, 2015
Artificial intelligence
The real consequences of artificial intelligence
Prof. Raj Rajkumar of Carnegie Mellon, Rodney Brooks of Rethink Robotics

and Manoj Saxena of The Entrepreneurs' Fund
84
Jan 28, 2015
EM competition
The globalisation of competition
Prof. Philip Lane of Trinity College Dublin and Prof. Pol Antras of Harvard
83
Dec 17 2014
100 best charts
The best of Fortnightly Thoughts 2014
82
Nov 28, 2014
Skills
People make the world go round
Bernard Liautaud of Balderton Capital and David Epstein, author of 'The

Sports Gene
81
Oct 23, 2014
Young consumers
How the young are shaping future consumption
Jeremy Rifkin, author of 'Zero Marginal Cost Society' and Rory Sutherland of
Ogilvy Group
80
Oct 3, 2014
EM reforms
The many forms of EM reform
Ruchir Sharma, author of Breakout Nations
79
Sep 10, 2014
Capex
The capex conundrum
Ola Rolln, CEO of Hexagon
78
Aug 14, 2014
Old consumers
Grey anatomy: How older cohorts spend and save
77
Jul 16, 2014
Disruption
Let's talk disruption
Prof. Bruce Greenwald of Columbia University
76
Jul 1, 2014
Industry repair
The value in repair
Nick Kirrage of Schroders
75
Jun 10, 2014
Buzzwords
Buzz! 22 things you need to know
74
May 27, 2014
Pollution
The eolution of pollution solutions
Prof. Sam Fanknhauser of Grantham Research Institute and Debra Tan of

China Water Risk
73
May 1, 2014
GDP
GDP: Forecasters' freiend or foe
Diane Coyle, author of 'GDP: A Brief but Affectionate History' and Prof. Erik
Brynjolfsson of MIT
72
Apr 14, 2014
Future materials
Material changes in the material world
Prof. Chris Grovenor and Prof. Peter Edwards of Oxford University, Ray Giibs,
CEO of Haydale
Interviewees
Neil Howe, Demographics expert
Jesse Berst, Chairman of the Smart Cities Council
Founders of Appear Here, Equipment Share, Getaround, Mast Mobile, Plated,

Narrative Science, Nutmeg, TradeBlock, Vestorly and Yhat.
Benedict Evans, Partner at Andreessen Horowitz
42
Issue
Date
Special Issue
Topic
Interviewees
71
Mar 27, 2014
Income Inequality
Unequal income, unequal consequences
Prof. Branko Milanovic of City University of New York Graduate Center and
Prof. Greg Mankiw of Harvard
70
Mar 6, 2014
Healthcare
Healthcare Innovation on the mend?
Sir John Chisholm of Genomics England, Dr. Peter Bach of Sloane-Kettering

Cancer Center and Sir Michael Rawlins of UK's Royal Society of Science, exNICE
69
Feb 21, 2014
Key Questions
15 questions that need to be answered
68
Feb 7, 2014
Private Companies
The rising importance of private companies
Prof. Clayton M. Christensen of Harvard, Tim Bunting of Balderton Capital and

Prof. Hermann Simon of Simon Kucher and Partners
67
Jan 23, 2014
Customer Loyalty
To have and to hold: Cutomer stickiness and tech
Bernard Charls, CEO of Dassault Systemes
66
Dec 11, 2013
100 best charts
Charles Himmelberg, GS US Credit Strategist
65
Nov 21, 2013
Cities
Brighter lights, bigger cities
Prof. Edward Glaeser of Harvard
64
Oct 31, 2013
Tech
Tech is everywhere
Paul Brody of E&Y and Brian Mukherjee, CEO of Blinkx
63
Oct 14, 2013
Europe
The changing parts of Europe
Prof. Otmar Issing of Center for Financial Studies, Dr. Dieter Wemmer of
Allianz and Jose Abad of Instituto de Crdito Oficial Madrid
62
Sep 26, 2013
Dominance
Concentrating on dominance
Prof. Peter Nolan of Cambridge University and Joe Studwell, author of 'How
Asia Works'
61
Sep 12, 2013
Habits
The compounding habits
David Halpern of the UK Government Behavioural Insight Team
60
Sep 2, 2013
Governments
The changing State of affairs
Prof. Mariana Mazzucato of University of Sussex, Prof. Michael Sandel and

Prof. Cass Sunstein of Harvard and Prof. Larry Kotlikoff of Boston University
59
Aug 1, 2013
Renewables
Time to renew interest in renewables?
Ditlev Engel of Vestas and John Searle of Saft
58
Jul 18, 2013
Commodities
Pedalling through commodity cycles
Jeff Currie, GS Global head of Commodities Research
57
Jul 4, 2013
Logistics
Movers and shapers: Why logistics matters
Bruce Edwards and Ken Allen of DHL, Dr. William Fung of Li & Fung and Jeff
Schwartz of GLP
56
Jun 13, 2013
China
The consequences of Chinas price discovery
Stan Druckenmiller of Duquesne Family Office, Gorden Orr of McKinsey and

Prof. Victor Nee of Cornell University
55
May 24, 2013
Stocks
The global stock take
54
May 10, 2013
Jobs
What is everybody going to do?
Andrew McAfee of MIT and Jeffrey Joerres of ManpowerGroup
53
Apr 25, 2013
Women
Why women working works
Gro Brundtland, former Prime Minister of Norway, Melanne Verveer, ex-US

Ambassador for Global Women's Issues and Jacqueline Novogratz of Acumen
Fund
52
Apr 11, 2013
Capital Intensity
How to capitalise on rising capital intensity
Huw Pill, GS Chief European Economist
51
Mar 14, 2013
Security
Tinker, tailor, hacker, spy
Richard Vary of Nokia, Mark Parsons of Freshfields and Nigel Inkster of IISS
50
Feb 28, 2013
Energy Efficiency
More energetic efforts needed in energy efficiency
Dr. Alex Claus Heitmann of Lanxess and James Tyler of Telecity Group
49
Feb 14, 2013
Behaviour
The unforced errors of behavioural biases
Prof. Daniel Kahneman of Princeton and Howard Marks of Oaktree Capital
48
Jan 31, 2013
Shale
Where will the shale gale blow next?
Paul Wogan of GasLog and David Demers of Westport
47
Jan 17, 2013
Manufacturing
Making things faster, stronger, leaner, better
Peter Marsh of the Financial Times, Prof. Neil Hopkinson of Sheffield

University, Avi Reichental of 3D Systems and Jonathan Flint of Oxford
Instruments
46
Dec 13, 2012
100 best charts
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Nov 30, 2012
Restructuring
Changing shape and shaping change
Michael Garstka and Alan Bird of Bain & Company
44
Nov 15, 2012
Food
Meaty problems, simmering solutions
Dr. Werner J. Bauer of Nestle and Karim Bitar of Genus
43
Nov 1, 2012
Growth
When growth is not enough
Jim O'Neill, Chairman of GS Asset Management
42
Oct 18, 2012
Mobile payments
Money, money, money in a mobile world
Peter Ayliffe of Visa Europe, Alastair Lukies of Monitise and Sarah Friar of
Square
41
Oct 4, 2012
Banks
Banking on change
Guillermo de la Dehesa, former Spanish Finance Minister
40
Sep 20, 2012
Countries
Where countries succeed companies follow
Prof. James Robinson of Harvard
39
Sep 7, 2012
Asset Management
The business of managing the worlds savings
Marc Spilker of Apollo Global Management, Gavin Rochussen of J. O. Hambro

and Ralph Mupita of Old Mutual
38
Aug 16, 2012
Housing
All quiet on the home front?
Doug Yearly, Jr of Toll Brothers and Rob Perrin of The Berkeley Group
37
Jul 26, 2012
Sports
Sport: The worlds favourite growth industry
Herbert Hainer of Adidas, Ralph Topping of William Hill and Jon Sigurdsson of
Ossur
36
Jul 12, 2012
Small-Mid Cap
The big small cap issue
Nick Robertson of ASOS, John O'Higgins of Spectris, Julian Diaz of Dufry and
Gerald Grohmann of Schoeller-Bleckmann
43
Issue
Special Issue
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Topic
Interviewees
35
Jul 12, 2012
Automation
The automation revolution
Dieter Manz of Manz and Anil Menon of Cisco
34
Jun 28, 2012
Quality/Value
Some value in quality, some quality in value
Dominic Barton of McKinsey
33
Jun 14, 2012
Russia
How much is Russia changing?
Oleg Tinkoff of Tinkoff Credit Systems, Alexander Novak, Energy Minister of

Russia, Mark Gyetvay of Novatek and Igor Levit of LSR Group
32
Jun 5, 2012
EM infrastructure
Digging the EM infrastructure story
Marcelo Haddad of the Investment Promotion Agency of Rio de Janeiro
31
May 17, 2012
Data
The Big deal about data
Mark Read of WPP, Michael Tobin of Telecity and David Rowan of the Wired
UK
30
May 3, 2012
DM Infrastructure
Can the West's infrastructure keep up?
Ian Tyler of Balfour Beatty
29
Apr 19, 2012
Dividends
The dividends of cash deployment
Peter Oppenheimer, GS Chief Global Equity Strategist
28
Mar 29, 2012
Shale
On the shale trail
Aubrey K. McClendon of Chesapeake Energy and Daniel Yergin of IHS CERA
27
Mar 16, 2012
Africa
Africa's turn
Thushen Govender of Tiger Brands, Runa Alam of DPI, Peter Schmid of Actis
and Simpiwe Tshabalala of Standard Bank
26
Mar 2, 2012
Value
The value of looking up
25
Feb 16, 2012
Innovation
Innovation, the crown jewel
Dr. Andreas Kreimeyer of BASF
24
Feb 2, 2012
Europe
European stocks and Europe are not the same
Peter Sutherland, Chairman of GS International and Pierre Kosciusko-Morizet

of PriceMinister
Jan 20, 2012
100 best charts
23
Dec 15, 2011
Bifurcation
Another year of bifurcation beckons
Prof. Ian Morris of Stanford
22
Dec 2, 2011
Middle East
MENA: In the middle of economic realignment
Wassim Younan, CEO of GS MENA
21
Nov 18, 2011
Education
Growing education and educated growth
John Fallon of Pearson and Prof. Anthony Grayling of New College of the
Humanities
20
Nov 3, 2011
BRICs
Not everyone can be a BRICs winner
Paul Walsh of Diageo
19
Oct 20, 2011
Global trade
Is global trade set to fade?
Dr. Ian Goldin of Oxford and Reinhard Lange of Kuehne + Nagel
18
Oct 6, 2011
Japan
Some hope for Japan, some echoes for Europe
Masa Mochida, President of GS Japan
17
Sep 22, 2011
Mining
Time to dig deep for the miners
Evy Hambro of BlackRock
16
Sep 8, 2011
Banks
Around the world in nearly 80 banks
Alexander Scurlock of Fidelity
15
Aug 26, 2011
Food
Rain and grain, hard to sustain
Robert Berendes of Syngenta
14
Aug 11, 2011
Quality stocks
Time to discriminate in qualitys favour
13
Jul 28, 2011
Germany
Germany's time, Germany's challenge
Joe Kaeser of Siemens AG
12
Jul 14, 2011
Credible growth
The incredible story of credible growth
Jim ONeill, Chairman of GS Asset Management
11
Jun 30, 2011
Power
Power plays amid power surges
Rupert Soames of Aggreko and Rudolf Hadorn of Gurit
10
Jun 17, 2011
Demographics
Aging angst or demographic decoys?
Matin Wolf of the Financial Times and Lars Srensen of Novo Nordisk
Jun 2, 2011
BRICs
Why the differences in the BRICs matter
Martin Wolf of the Financial Times and Ivan Tong of Sparkle Roll
May 20, 2011
Smart devices
Technological disruption equals economic eruption
Warren East of ARM
May 5, 2011
Winners
Why you need to buy and hold industry leaders now
Anthony Ling, GS Global CIO
Apr 14, 2011
China
The rise and rise of the Chinese consumer
Anthony Bolton of Fidelity
Mar 31, 2011
Nordics
Northern Soul - unlocking Nordic secrets
Arne Karlsson of Ratos
Mar 18, 2011
Luxury
Brands deluxe redux
Sir Martin Sorrell of WPP
Mar 3, 2011
Capex
The consequences of consensus-busting capex
Bill McDermott of SAP
Feb 17, 2011
M&A
M&A and the new world order
Feb 7, 2011
UK
The UK; from first to worst?
Dr. Ben Broadbent of the Bank of England
Note: Interviewee profiles are as of the date of respective publications
44
Special Issue
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45
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Fortnightly Thoughts

July 28, 2016

15 interviews to read this summer

The evolution of innovation

The changing shape of economics

Sumana Manohar, CFA

Goldman Sachs Global Investment Research

Interview withMichael Porter

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withDan Ariely

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withAswath Damodaran

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withGreg Mankiw

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withEdward Chancellor

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withPeter Diamandis

So what kind of companies will succeed in the world of abundance?

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withErik Brynjolfsson

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withRobert Cialdini

The 6 principles of influence

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withBenedict Evans

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Interview withBranko Milanovi

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Change in real income between 1988 and 2008 at various percentiles

Real PPP income change (in percent)

Percentile of global income distribution

Source: Branko Milanovic.

Source: Branko Milanovic.

Where is the middle class?

Different countries/income classes in global income distribution, 2005

Population according to income of country where they live (2009)

Source: Branko Milanovic.

Source: Branko Milanovic.

Goldman Sachs Global Investment Research

Interview withVic Abate

Were the only

Goldman Sachs Global Investment Research

What will define future industrial winners?

Goldman Sachs Global Investment Research

Interview withRodney Brooks

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

How accommodative are regulations for collaborative robots?

Goldman Sachs Global Investment Research

Interview withRory Sutherland

Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research