The Exponential Economy
A decade ago, economists and investors began referring to the “New Economy” to describe the revolution in economic affairs that they expected the Internet and other computer technologies would launch. Even at the time, it wasn’t clear what exactly was so new about the New Economy that it would suspend the conventional laws of economics. After all, the post office, telegraph, and telephone in their day each cut the intermediaries out of certain kinds of businesses at least as effectively as the Internet has. With a few notable exceptions, such as Google, the novel business models rolled out in the dot-com boom failed quickly and spectacularly. And there was certainly nothing new about productivity boosts and cost cuts enabled by technological improvements: that is precisely what the Industrial Revolution was all about.
After thinking more deeply about the many parallels between the booms we’re seeing today in technology and those of the 20th century, I realized that there is one element of the New Economy that is truly new and unprecedented. We have now begun enjoying the benefits of fundamental enabling technologies that are undergoing sustained exponential growth, rather than the normal S-shaped burst of growth followed by maturation and plateau. As illustrated by Moore’s Law—the most famous example of a power-law growth trend—businesses affected by such a technology must at least cope with radically compounded exponential deflation in a vital set of goods. Those that do better than coping, that actually harness their fortunes to that deflationary trend, can themselves grow at stunning rates for much longer than was possible a half-century ago.
Semiconductors are just one of a diverse range of technological areas with the potential for exponential growth over the long term. Hard drive storage capacity, DNA sequencing and synthesis costs, data transmission rates, software price-to-performance ratios, and broadband Internet subscribers already are following exponential curves. Other fundamental areas, such as high-temperature superconductors, thermonuclear fusion reactors, synthetic biological systems, and self-assembling nanomachines, have the potential for exponential growth but have not yet reached the “bootstrap” phase that proves their commercial feasibility and ignites initial demand for the products.
I have identified five key ingredients that create the conditions necessary for a technology to take off on an exponential path:
- A critical mass of people both competing and collaborating to achieve common goals, using a shared set of standards;
- A deep reservoir of economic demand to pay for decades of performance improvements and cost reductions;
- A bootstrap mechanism that enables incremental progress thereafter;
- Deep understanding of the underlying science so that inventors can find ways around apparent physical limits;
- Conversion of the observation of exponential growth into a self-fulfilling prophecy.
I am convinced that the economy of the 21st century will be an Exponential Economy, driven in large part by technologies that share these characteristics. Those who wish to invest and build businesses in the Exponential Economy should take time to understand which technologies are ripe for exponential growth, and what drives them.