Exponential change creates a growing gap between the old and new

Consider the humble transistor. In 1958, Fairchild Semiconductor sold 100 to IBM for $150 apiece. By 1972, this had fallen to 15 cents. Come 2014, when the world’s chip fabrication plants produced eight trillion every second, the cost of a transistor had dropped to a few billionths of a dollar.

This hyperdeflation in the cost of computing power results in a constant acceleration in the speed with which new technologies emerge and spread, argues the entrepreneur and writer Azeem Azhar in Exponential: How accelerating technology is leaving us behind and what to do about it. The founder of PeerIndex (which monitors social media influences for companies) and eSouk (an internet incubator), explains how new products are ripping through our economies faster than ever. Using transistors to sequence the human genome for the first time in 2000 cost between $500m and $1bn. By 2020, Shenzhen-based gene sequencers BGI Group could do it for $100.

This holds equally for how quickly new technologies diffuse. It took over 50 years for the telephone or automobile to reach 75 per cent of Americans. Mobile phones and the internet then took 25 years. For smartphones it was under 10.

Periods of explosive technological change came before, but not like this. “The rates of improvement on a year by year basis are much faster than we saw in the steam age, printing press, or first diesel engines, and are being sustained over decades,” Azhar tells me.

In fact, he says, if we were to plot the rise of these technologies on a graph, they would follow an upward curved line. It is not just the speed which is growing, it is also the rate of acceleration. Not so our institutions. From politics to systems of economic organisation, they plod along on a straight, incremental line.

“This creates a gap I call the exponential adds,” he says. It turns out to be a serviceable tool to analyse, well, nearly everything: “the stresses and strain in competition policy, employment, trade, defence and security”.

Take investment. At the century’s start, companies worth $1bn had typically taken more than 20 years to achieve that valuation. Now, many start-ups achieve that level within a year and a half. Chinese electronics maker Xiaomi took 21 months after it was founded in 2010. In 2014, the US ecommerce firm Jet.com managed it in four months. It was later acquired by Walmart.

“You could argue that's a frothy market,” says Azhar, but look closely, and you can see “fundamentals accelerating away”. Exponential change can create value very quickly. 

Azhar’s argument is that while public markets data is good at determining velocity (how fast the car is going), what we should be looking for is the change in its acceleration rate.

So instead of looking at the speedometer to find what mathematicians call the first-order derivative, investors need to look for the second order, the change in velocity against time, he says. And then they need to look at the third order – the change in the change of velocity.

It’s the sort of thing a venture capitalist looks for in private markets. Find a young company that's highly sensitive to second and third derivative changes, and you can confidently say “the market values this company sub-$1m, but I'm going to value it at $500m and I'll be proved right in five years.”

Meanwhile, as our technology whizzes along, our social structures are stuck in yesterday's world. Try getting a mortgage as a gig worker: mortgage lenders charge a premium for anyone not a salaried worker paying tax by PAYE. More broadly, our institutions, especially in Britain and the US, reflect the assumptions of the Chicago School economics espoused by Milton Friedman: “you've got the market, and you've got the state, and there's nothing else,” he explains. Technological change runs rampant through these assumptions.

So, one step towards solving this exponential gap, Azhar argues, is applying frameworks other than Milton Friedman's. A ‘commons’ approach could be a start, using open source software as a model: a licensing arrangement where developers release the source code for others to use, modify, and distribute. The scientific response to Covid-19 has been an open source effort, “putting all the research into the public domain rather than behind paywalls,” as Azhar describes it. Wikipedia and the protocols underlying the internet itself are other examples of places governed as commons.

Once tech companies are providing essential infrastructural capacity, that part of their capabilities must be regulated differently from the rest of their business, says Azhar. Historically, businesses have argued "if there’s an externality [side-effect], it's society's problem”. If you make the argument that pollution ought to be society’s problem, this should also hold for positive externalities like the data and networks companies inadvertently produce: Facebook, for example, connected four billion people on the planet. These positive externalities should join the commons, too, he argues.

Engineering flexibility into our social arrangements, to prepare them for disruption, can also help close the exponential gap. At moments of change “you need shock absorbance – your seatbelt for turbulence on the aeroplane – and resilience in your system”. Denmark's ‘flexisecurity’ approach to the labour market lets employers quickly hire and fire staff, nimbly responding to shifting economic winds – but also guarantees employees up to 90 per cent of their previous earnings if they are let go.

Azhar believes any organisation that accumulates too much power needs to have its power checked, and exponential change makes tech companies very powerful indeed. On the flip side, he argues, tech companies have often acted more in our interests than democratically governed states. If a new computer virus or ransomware appears, we don't rely on the army or NATO to quash it but instead look to Microsoft, Google, or Apple.

Ultimately, if we get the balance right, the exponential age is one of hope. Renewable energy could stave off the environmental crisis, while bioengineering could make us all healthier. “Technology, it turns out, is something that we control,” and if we control it properly, it can be a force for exponential good.

Exponential: How accelerating technology is leaving us behind and what to do about it by Azeem Azhar is published by Cornerstone, £20.00.