Book Summary: The Second Machine Age

secondMachineAge

Summary

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee attempts to classify the current incredible breakthroughs we are seeing in the technology industry as a second machine age. The first machine age, the Industrial Revolution, “allowed us to overcome the limitations of muscle power” (Brynjolfsson, McAfee 6). Now, the second machine age will do the same for our mental power “allowing us to blow past previous limitations and taking us into new territory”(7). Brynjolfsson and McAfee make three broad conclusions:

  1. “We’re living in a time of astonishing progress with digital technologies” (9).
  2. “The transformations brought about by digital technology will be profoundly beneficial” (9).
  3. “Digitization is going to bring with it some thorny challenges” (10) because of technologies capacity to perform jobs previously only done by humans.

These massive strides occurring are the result of technological innovation being exponential, digital, and combinatorial.

Because of these new technologies it will be necessary to find new economic metrics to measure growth because our focus is now on “ideas not things” (108). For instance, free software clearly adds value to the economy but “these services are virtually invisible in the official statistics” (110). While these new technologies will bring about unprecedented bounty, they will also lead to considerable income disparity. Specifically, “the demand for work has been falling most dramatically for routine tasks, regardless of whether they are cognitive or manual” (138). The widespread, cheap replication of digital technologies has led to “the proliferation of superstars in winner-take-all markets” (178). The best and cheapest product will be used by the vast majority of people with very few using the second and third best. This leads to only a small fraction of people reaping in the majority of benefits. As this disparity increases significant economic problems will begin to appear for the middle class.

In order to remain valuable in this new age, Brynjolffson and McAfee recommend individuals “work to improve the skills of ideation, large-frame pattern recognition, and complex communication” (197). In terms of policy, the solution is to promote policies that

  • “teach the children well” (208)
  • “restart startups” (214)
  • “make more matches” (217) during job searches
  • “support our scientists” (218)
  • “upgrade infrastructure” (220)
  • “tax wisely” (224).

For the long-term, a negative income tax is recommended, because it allows “a guaranteed minimum income with an incentive to work” (238), and the promotion of the peer economy and crowdsourcing.

Specific Topic: Superstars and the Winner-Take-All Economy

In previous generations “revenue more closely tracked absolute performance” (152). “Someone who is 90 percent as skilled…creates 90 percent as much value and thus can earn 90 percent as much money” (152). This made sense because jobs were being performed almost entirely by humans. However, with the rise of digitization leading to the cheap proliferation of products, markets have been shifting focus to relative performance. Digital products can be delivered globally for almost no cost. Now “the top-quality provider can capture the whole market” (152). This results in the next-best provider receiving significantly less compensation and is referred to as a winner-take-all market.

The market shift towards winner-take-all is because of:

  1. “the digitization of more and more information, goods and services”
  2. “vast improvements in telecommunications and to a lesser extent, transportation”
  3. “the increased importance of networks and standards” (153).

Digitization allows for services to be distributed cheaply because they are limited by number of bits rather than some physical resource. Improvements in telecommunication have allowed for the rise of a global marketplace letting consumers become pickier in what products they choose and businesses being able to reach anyone with an internet connection. “Second-rate producers can no longer count on consumer ignorance or geographic barriers to protect their margins” (155). The increasing importance of networks and standards is seen with the network effect where “users prefer products…that other people are flocking to” (156). As one product gets more people using it, it starts dominating the market and people flock to it by default.

As a result of superstars and winner-take-all markets, we are seeing a fundamental shift in income distribution. “When revenues are roughly proportional to absolute performance…the earnings distribution is likely to roughly match the distribution of aptitude and effort” (159). This would be a normal distribution. However, superstar markets are switching income distributions from a normal to a power-law distribution.

powerVsNormal

Comparing a Power-law and Normal Distribution. In this case the horizontal axis would be income and the vertical axis would be population.

This means that “the likelihood of extreme events is much greater” and a small minority “reap a disproportionate share of sales” (161). The biggest implication this has is that “the mean…of a power-law distribution is generally much, much higher than the median or mode” (161). The result of this is that even though mean income may increase the majority of people will no longer be seeing an increase in their income. Additionally, the normal distribution for income “supported a bulging social middle class” (161). With the switch to a power-law distribution this income is no longer available and so we may see a shrinking middle class and ever increasing income disparity.

Overall Assessment

Overall, I found The Second Machine Age to be a very compelling read. Brynjolffson and McAfee raise a particularly strong argument for how this second machine age will be fundamentally different from anything we are seen in the past. They provide many examples both from visits they took while researching this book and interesting research being done at top universities and companies. The book is well organized and explained thoroughly allowing for readers to fully grasp just how different things are now and the great impact this will have in the coming years. Any book on this topic has its fair share of speculation but Brynjolffson and McAfee address this head on choosing to state this outright and give their best suggestions for ways to tackle the new challenges the second machine age will bring with it. Though the reader may personally disagree with some of the claims they make, it is impossible to deny that Brynjolffson and McAfee are experts in their fields and have a clear grasp on the content they are writing about.

My one critique of the book is it may be difficult for the average reader to pick up and casually read. By the very nature of the topic, field specific vocabulary and concepts must be used. This makes it a difficult book for anyone who does not have an introductory understanding of economics and digital technologies. While no formal education in economics is needed­, in fact the authors make an effort to explain terms as they come up, there were still times when I had to put the book down briefly to look up a specific concept. With that in mind, this book is perfect for anyone who wants to begin getting a slightly more technical understanding of how technology will be fundamentally altering the economics that drive our society.

References

All quotes come from the Kindle edition of the text found here.

Brynjolfsson, E., & McAfee, A. (2016). The second machine age: Work, progress, and prosperity in the time of brilliant technologies [E-book]. New York: W.W. Norton & Company.

4 thoughts on “Book Summary: The Second Machine Age

  1. This book seems really interesting overall. An idea you mentioned that struck me was the distinction between the first machine age and the second machine age, and how the former helped humans overcome muscular limitations while the latter helped humans overcome physical limitations. I never thought of technological change in this way. Also, the fact that certain aspects of the economy aren’t accounted for in economic metrics since they are just ideas was really interesting since it shows how so many metrics are outdated.

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  2. Great job on the review of the book. The shift from a normal distribution to a power-law distribution in terms of income sounds very interesting. I am curious to see in the future if this becomes more of a reality and if the US government will try to enact any regulations to hinder this shift. I am interested to see how the companies we visit compete in the winner-take-all market especially during this Second Machine Age.

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  3. Thanks for a great summary, David. I read McAfee and Brynjolfsson’s other book: Machine, Platform, Crowd last year and, in it, they often referenced this book. You’ve now confirmed my beliefs that it’s a fascinating book. Your discussion of winner-take-all markets is highly relevant to our current world, so I am glad you were able to gain something so valuable from this book. See you Wednesday!

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    • Hey David,

      Great analysis. Like Jessica, I find the idea of a power law income distribution interesting, but I wonder if if the future really turns out how these authors envision it, a graphic with two data clouds (basically the haves on one end and the have-nots on the others) might be more accurate. I guess we’ll find out. As I side note, I would guess that if one modeled per person income for the current global economy, it would look like a power law distribution. Your discussion of the author’s policy recommendations was cool as well, and I wonder whether there will be a tipping point in government, a New Deal type period, where we go believing we can manage change by upgrading infrastructure/education as we have tried to do over the past several decades to really rethinking and changing how government works with something like guaranteed income.

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