for hbr.org, | October 12, 2021

Tech’s Exponential Growth – and How to Solve the Problems It’s Created

Understanding and improving the impact that Big Tech has on society

Read at hbr.org

ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.

Over the past several decades, we’ve all watched the technology sector explode and change our lives in fundamental ways. We’ve moved from mainframe computers to laptops and smartphones, dial-up internet to 5G wireless, floppy disks to storage in the cloud, DVDs to streaming, AOL emails, Insta, Snapchat, Roblox, and TikTok. And the companies behind all these devices and services are likely to go down as some of the greatest corporate success stories of all time. They innovate, they dominate, they earn piles of cash to reinvest. They’re driving what our guest today calls the exponential age, a period of unprecedented growth.

But there’s just one problem. The rest of society isn’t moving at the same pace. The rising technology tide is not lifting all boats. There’s a widening divide between digital haves and have-nots. There’s an exponential gap. And our institutions now need to hurry to fill it.

Here with me to talk about how is Azeem Azhar. Azeem is an entrepreneur and investor who hosts the HBR Presents podcast Exponential View. He’s also the author of the book, The Exponential Age: How Accelerating Technology is Transforming Business, Politics, and Society. Azeem, so great to chat with you today.

AZEEM AZHAR: Alison, it’s such a pleasure to be here.

ALISON BEARD: So let’s get this straight for our business audience. Technology has improved our lives in so many ways. These companies are case studies in value creation. Exponential growth is a good thing, right?

AZEEM AZHAR: Well, I think that what we see is technologies that improve dramatically. What does improvement mean? It means that they come down in price for the same oomph and kick they give us. And as they come down in price, we buy more of them within our economies. As they become more ubiquitous, new business opportunities emerge. We have software companies because we had cheap computers. All of that results in tremendous value creation, wealth creation, new industry sectors, lots and lots of employment.

But of course there is the but. And the development of technologies and innovations like this is not distinct from the rules that we use to guide our world. And so we create these new potentials for which the rules are unsuited. And I think a simple example to think is, think about is we didn’t need seat belts before we had cars. As soon as we started to get cars and they started to go quite quickly and there were more of them, we needed rules about seat belts because passengers and pedestrians were getting hurt.

And I think we’re well past that point when it comes to technology and these fast-changing technologies of saying, we need to think about what the nature of those seat belts should really be. Because these technologies are so global, because they are so effective, because they are so general, we really need to have that conversation faster than we’ve been having it.

ALISON BEARD: In what ways though are consumers being hurt? You make the point that many of us are willingly giving up our data for the conveniences we’re getting, and many of these services we’re using for free.

AZEEM AZHAR: That’s very true. And I think that in the context of how we’ve thought about what is the job of a business is over the last 50 years, we have focused particularly in the United States on this idea of prices coming down. But we know from the study of economics, we know from the study of politics, that that isn’t the only way in which businesses effect the world.

One very obvious example is that we don’t price pollution effectively. So we sit on the precipice of a climate crisis, even though technologies and products have got cheaper and cheaper, because the impact of all of that carbon pollution was not baked into the price.

And I think what we see within these technologies is that while consumers might get a first order good deal out of either a cheaper phone or a 10 minute Doordash delivery for an evening dinner, there are knock-on effects that are not embedded in those pricing. And in the case of that dinner that you ordered through a delivery service, that knock-on effect might be the quality of work that the people working in a firm like that are.

So the real question is to say, let’s look beyond the simple issue of did prices come down? Did we consume more? And let’s start to look at these second order effects, some of which we can measure economically, some of which we can’t measure economically.

ALISON BEARD: So you’re talking about the impact, not on the people who are using these goods and services, but the broader society.

AZEEM AZHAR: Well, it’s complicated, isn’t it, because if you’re definitely not using these services, then you may find yourself on the sort of wrong end of a transition. And I think a really good way to think about that is there’s a measure called the labor share of national income. It’s a macroeconomic measure.

And it looks at an economy and says, what portion of national income went to workers and what portion of national income went to the owners of companies or capital. And what’s happened over the last 40 or 50 years pretty much across all the advanced economies is that that ratio has shifted very much in favor of the providers of capital and away from the workers.

Now, most of us are workers, right? Most of us are employees. And what that suggests is that the employee is not getting the same share of what the economy is producing.

ALISON BEARD: But you draw a line from the rise of the technology sector, its exponential growth, and this widening gap between the haves and the have-nots.

AZEEM AZHAR: Yeah, well, there is a moment where you really feel that things have changed. If we go back to 2010, the world’s largest companies were oil companies and car companies and telephone and electricity businesses. And by 2015, the world’s largest companies are the tech companies that we are sort of so used to seeing in our headlines, whether it’s Facebook or Alphabets, or Apple. It looks like a real moment, a real shift, a pivot point in that short period of time.

We see the economy switching. And in that switch, we have companies that behave really quite differently to the companies of the industrial era. The companies of the industrial era had a series of forces of gravity that kept them back. It would be things like the complexity of managing a very, very large industrial conglomerate. It would be things like diminishing marginal returns. It was progressively harder to build the nth car because you had to source raw materials.

Whereas the businesses of the exponential age don’t seem to face that same force of gravity that maintains their size. They have broken the chains of your managerial complexity. They can get very big. They can operate in many, many different sectors. If you take a look at a company like Apple, not only does Apple make computers and tablets and phones and watches. It also has a services business. It’s building a healthcare business, it’s building cars. It even builds its own chips. So in business strategy terms, it’s expanded horizontally and it’s expanded vertically. And it doesn’t seem to show many signs of stopping, of reaching that natural limit that companies used to get to. We are entering a period where, which I call the unlimited company rather than the limited company, because they have broken the chains that traditionally constrained how big a firm could get.

ALISON BEARD: And why have they been able to break through in that way?

AZEEM AZHAR: There are a number of reasons, but one of the most important is the idea of network effects. And network effects are very common in communications businesses. Its the fact that if you and I have a phone, that’s kind of nice, we can call each other. But if someone else gets a phone, now there are more people. We can call in the fourth customer with a phone and the fifth and the sixth, adds value to all the previous customers. And network effects tend to create a winner take all markets. Of course the very first ones of these, were the phone companies like AT&T, but more recently, it’s been the companies in the tech industry who build operating systems and the operating system has a network effect. Actually, it’s very, very well chronicled, this idea that if you build a software platform, it will have this dynamic of appealing to customers, and as you get more customers that will appeal to more developers, who will write better software, which will appeal to more customers, who will attract more developers.

And I think at the heart of exponential age companies, is this idea that platform business models enable network effects. Network effects enable winner take all success within large or smaller markets. And I’m sure many of the listeners to this podcast have heard over the years, how lots of companies outside of the traditional software and IT domain are starting to think of themselves as platforms. Because from platforms their in lies fundamentally that land of milk and honey for the chief exec, which is a sort of monopolistic network effect.

ALISON BEARD: So what would you like to see happen? How can our institutions begin to catch up and fill this exponential gap?

AZEEM AZHAR: Well, I talk about three design principles. The first principle is one of commonality. The second is flexibility and the third is the idea of resilience. What I mean by commonality is to look at where we are creating something that looks like it is a common infrastructure or a common good or a public service, and putting more obligations on those business activities than we would on some other private enterprise. We’ve got historical precedent for it. We ask our telephone utilities and our water utilities to behave differently around the provision of basic services than we ask of our hedge funds, who we say, “Go off and make money and we won’t ask too many questions.” So we understand that principle.

One of the reasons why we have these incredible digital technologies, like the internet, is actually because a lot of the development was put into the public domain. It was put into the commons in the first place. I mean the original internet protocols are not proprietary, they are public domain. Something like Wikipedia, which we use and we rely on, is again, a commons. And so that principle of saying at some point, very, very large technology companies are providing an essential infrastructure and we have to ask much more of them, is a really key recommendation. Of course, in the book I go into more details about what that might look like.

ALISON BEARD: So let’s talk about flexibility. What do you mean by that? And what reforms do you want to see?

AZEEM AZHAR: Well, flexibility is super important because we’re entering a period of really dramatic change. When something is moving as quickly as it is, any rigidity you build into your system, won’t allow you to adapt for the reality of when this rubber of this very fast moving technology hits the road of the world. And so those are really about principles when we think about what do employers need when they look at their workforces? If labor laws are too constrained and it’s hard to fire workers or shut down businesses that are not successful, it makes companies ill prepared for the pace of change that they face.

So those are the types of things I think that come out through the value of flexibility. But as you might imagine, if you are making suggestions like that, you’re also creating a bunch of risks, which is where the third value of resilience comes in.

ALISON BEARD: So talk to me a little bit more about that.

AZEEM AZHAR: Yeah, well, so resilience is the other side, I think, of flexibility. Things are moving very, very quickly. You don’t know quite where you’re going, where the shocks are going to come and so you need to think a little bit about how is your system going to absorb those shocks. Building on the previous example, if you are saying to companies, in order to be flexible in this fast changing world, you need to have license to fire or shut down units and make people redundant. The other side of that is that those people have to be able to function in society and so they need more resilience and more security, maybe through the social net that is provided.

And a great model that that brings those together is in Denmark, it’s called Flex Security. It allows employers to make workers redundant quite quickly, but workers know that they will have a safety net of 80, sometimes 90% of their previous wages while they adjust to that shift and look for new work.

But in the context of companies, we also see it in the consequence of the COVID pandemic, where supply chains had been really optimized for efficiency. And you notice, I don’t say much about efficiency. And they’d been optimized so much for efficiency, that there was no fat in the system. There were no buffers. There were no intermediate warehouses. There were very few alternate routes to get products to market. And so the moment you have a shop, the whole thing seized up.

And so when we look at when businesses look at the decisions they’re making about designing either their own internal systems or an employee training or their supply chains, looking up and down to their partners, they should be thinking about, what is it for this to be resilient to shocks that we perhaps can’t easily predict? And are we trading off too much resilience in the name of short term efficiency gains? Which I, I think has been the by word of a lot of business for the last two or three decades.

ALISON BEARD: So it sounds like you’re interested in a mix of both reform from within the industry, them realizing that they should change some of the ways in which they do business, but then also sort of outside influence from governments. So where is that balance?

AZEEM AZHAR: That’s a really great question. I mean, clearly businesses need to read the reality of where they are and understand the pace with which these technologies are changing, the opportunities they create. So that’s really important. When it comes to the rules that we need, I’d like to think back to where we were at the turn of the 20th century, and really before Henry Ford had created this incredible company. Before we did that, the rules around employment were much, much less formal than they are today. And I think a lot of historians look at the Fordist moment when he took at the time, very radical technologies of electricity and the car and brought them together in these big factories in the Ford system of mass production. And he created a new bargain, which was higher wages for more subordination for the employee, but a kind of promise that that work would last for quite a lot of time, so you were no longer a day laborer.

And there was an instance of a business leader who was at the forefront of helping us redesign and rethink what employment looked like. And that then turned in through the actions of unions and collective worker action and through the actions of politics into a framework that both in the US and in Western Europe kind of set the ground for what employment looked like for the next 70, 80, 90 years.

And I think we’re at a similar point here, where business leaders have an incredible opportunity to stand up and say, “What is it for us to offer great quality employments?” And even in this world of gig work and platform work and remote work, and what should those rules end up looking like? And I think one reason why I would encourage leaders in business to do that is because you can start to see whether you’re in Europe or in the United States, that politicians are stepping up to say, “Look, the rules really need to change.” And so the question, if you’re a chief executive is, “Do I want to be entirely a rule taker here, or do I want to be able to listen to my communities and listen to my employees and participate in shaping the rules?” And I would encourage leaders, especially at this time, this once in a century time of change to step up and participate in that decision making process.

ALISON BEARD: Yeah. I want to push you for sort of specific recommendations. What are say two or three things that you would love to see happen in the next couple of years to close this gap that you’re talking about?

AZEEM AZHAR: Well, I think one of the most important ones is to say to companies that have now found themselves effectively running our day-to-day infrastructure, that you look like infrastructural companies. And because of that, we are going to demand much more from you. We’re going to demand more transparency of your operations, more transparency of your decision-making. We’re going to insist on rights of equal access to competitors. And we’re going to ask for those types of utility infrastructure style services to be much, much more interoperable. And in recent weeks, we’ve seen in Japan and Korea moves towards Apple’s app store, where, for example, in Korea, you will soon be able to pay for your Apple apps through other payment providers other than Apple. And that’s an example of saying, “Well, look, this is now a utility and other people should have fair access to it.”

The second example would really be around taxation. That feels like it’s an easy question to address. We should aim for a global minimum tax. We should aim for a harmonization around that, and simply accept that these complicated businesses, which build complicated products are not going to look like the car companies and the steelmakers of the last 100 years they are going to ultimately derive their value in quite interesting ways and therefore will need to just tax them in ways that are quite simple, that close the loopholes.

The third intervention on the big technology companies is to unpick the black box. It is to allow governments and regulators to be able to look into their operations and to stress test those operations and to check for their second and third order impact, because we do this in so many other sectors. In the financial services sector, banks often have to be run stress tests, which are these little war games that check whether under extreme circumstances their balance sheets will stand up to a test. And yet the big tech companies are as systemically important as the big banks for keeping our economies running. Yet we don’t look into them and say, “Look, is this really working the way that we want to work? Have you taken shortcuts that might create risks in a bad situation, we won’t be able to deal with?”

And so with the technology companies, it’s not exclusively economic risk, it’s also social risk. It’s the issue of what goes viral on Facebook, how does fake news about vaccines, or treatments for COVID spread? And we need to go further than simply trusting the platforms to say, well, we’re doing our best, and delve deeper to say, how is this actually working? What choices are you making? What is acceptable? What is not acceptable? And I think that is a process not just of transparency, but also of observability.

ALISON BEARD: I want to end by asking you two questions. One, what scares you most about our technological future? And two, what makes you most excited or optimistic?

AZEEM AZHAR: Okay. Great. So start with the scare so we can end on a high note.

ALISON BEARD: Exactly.

AZEEM AZHAR: Yeah. You know, I think the biggest concern that I have is that these companies are spilling out from simply being phone companies into being the fabric of society. And the fabric of society has typically been run by all of us for all of us and not simply for profit. And if we don’t close the exponential gap, the ability for companies to seek profit, whether it’s by emphasizing algorithms that promote conspiracy theories, or whether it’s by shutting out competitors at an early stage in their development, will simply increase and things will start to get sclerotic and we will see less competitive dynamic economies, but we’ll also see a lot more political risk emerge.

ALISON BEARD: Okay. And now the bright future.

AZEEM AZHAR: Well, what makes me optimistic is that these technologies are really remarkable. And when we stand looking at the challenge of, for example, climate change, it’s quite clear that while technology on its own won’t get us to some kind of solution, the power of these technologies will be an essential part of whatever ends up dealing with climate change for us. And the challenge is not so much, can the technologies do these things now or in the near future? It’s much more can we, as members of society, as people govern those technologies for our own benefits?

ALISON BEARD: I hope we can. Azeem, thanks so much for being on the show.

AZEEM AZHAR: That’s my pleasure. Thanks you, Alison.

ALISON BEARD: That’s Azeem Azhar. He’s the host of the HBR Presents Podcast, Exponential View, and the author of the book, The Exponential Age: How Accelerating Technology is Transforming Business, Politics, and Society.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Alison Beard.