Unlocking Frontier Technology: The Policy Challenge of the Digital Economy

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Progressive Policy Institute




For many people, information technology has significantly helped sustain their quality of life during the pandemic. We are able to visit friends and relatives over video chat, to shop online, and to stream movies. Many people are able to work from home thanks to new technology. This should come as no surprise. Information technology has been creating new benefits for consumers, new well-paying jobs, and improved productivity growth for some time now. Large firms across the economy have been making huge investments in new information technologies that have delivered major social benefits.

These investments in software and hardware have accelerated in recent years, especially outside the tech sector. To just give a couple of examples, from 2015 to 2019, software and tech hardware investment in the waste management industry rose by 75 percent and 57 percent, respectively, as leading waste management companies built out digital platforms to deal with the increasingly complex flows of electronic and other types of waste. Over the same period, hotel chains and other accommodation companies boosted software and tech hardware investment by 71 percent and 37 percent, respectively, to manage costs and revenues. Pharmaceutical benefit managers invested in sophisticated information technology systems to handle the complex prescription and pricing policies that are at the heart of today’s drug distribution systems. And electric grid companies need complex monitoring and pricing systems to handle the new mix of renewable and non-renewable energy sources, and the flexible pricing models that come along with them.

The expectation is that these investments will eventually lead to broad gains in productivity in these industries, translating into a more prosperous society. Nevertheless, some large firm investments in technology have serious social consequences. Everyone is aware, for example, how social media platforms have helped misinformation to spread widely, misleading people about public health measures, vaccines, and political processes.

Yet, while misinformation is an important policy issue, it is not purely about digital technology — traditional media have also played an important role. Furthermore, only a few companies provide social media and there are deeper and broader problems raised by new generations of information technology.

More generally, recent economic research shows that increasing use of information technology has helped increase the dominance of large firms across the economy. This competitive advantage, in turn, has made it harder for new entrants and smaller firms, undercut innovation, exacerbated income inequality, and undermined government regulators.

These changes pose substantial challenges for policymakers. While we want to encourage firms to invest in new technology and to innovate — especially firms in those parts of the economy where productivity and use of technology has lagged — policy also needs to ensure that the knowledge of new technology and the benefits spread throughout society by opening up competition and increasing the flow of knowledge.

The problem is not “bigness” per se. Only large, complex systems can deliver these benefits, so we need large firms to innovate and invest in them. But policy can play a role in prompting or encouraging large firms to provide greater access to their technology and that can go a long way toward ameliorating the problems created by these new systems.

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