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Digitization, Change and Economic Growth

By Fredrik Bergström

The first 10 to 15 years of the 2000s will most probably be considered a turning point in economic history. That is when the digital economy fully came to replace the old, analogue economy. In many industries, digitization is at the acceleration point on the classic S-curve, indicating where new services, products and technologies are emerging.

Digitization

New technology drives economic development

Societies are in constant transformation, with "new" ideas challenging ”old" ones. One objective that drives change and development is the desire to improve productivity, because higher productivity is the most important explanation of long-term prosperity.

The concept is that higher productivity leads to higher incomes. Each person produces more goods and services and therefore receives a higher salary. Higher incomes can then be used for increased consumption, more investment, more public services, but it can also mean more leisure.

Since the 1800s, total economic output (GDP) has increased by 100 times in Sweden while the population has almost quadruple. Thus, we have today about 25 times more resources per person. Economic development is thus a prerequisite for everything we take for granted today.

There are several reasons for economic development, but one of the most important is the introduction of new technologies. The steam engine allowed the creation of energy in an efficient and powerful way. Mechanization lead to machines that replaced humans’ hard work. Electrification brought opportunities to all regions. Again, technological changes challenge old structures. Together, the steam engine and mechanization contributed to making obsolete traditional methods of production in many industries. Electrification in turn contributed to out-compete production methods that were derived from the steam engine.

Digitization affects everything

One of the great innovations of our time is the digitization that leads to the emergence of computers, Internet and many applications. Digitization is now a technology that develops and challenges old ways of doing things in many areas. The question is how it will change the way we produce goods and services, consume and live. How will people work, consume and live by 2050? Will it be radically different from the late 1900s?

Digitization affects everything

All online shoppers

There is no doubt that digitization will lead to big changes, but at the same time one should be aware that new technologies require many factors in order to have full impact. E-commerce is a good example of this since its roots date back to the late 1800s, with the introduction of an innovative idea: mail ordering. And even though the Internet was invented in the 1950s, e-commerce (mail ordering via the Internet) started to take off years later, in the late 1990s. Expectations were great, but some ingredients were still missing. Technology continued to develop over the next 10-15 years, with faster connection and secure online payments, and finally new business models emerged to sell online, with better logistics and real consumer confidence.

The growth of e-commerce is likely to continue, but "old" sales channels will not disappear overnight. E-commerce is still only about five percent of all trade, which is about the same as what mail-order trade accounted for when it was at its peak. But digitization affects the way we do commerce in many other ways. Logistics has been trimmed through barcode systems, price comparison sites contribute to better competition and major traditional retailers have implemented e-commerce strategies.

The development takes time

Development is a long process, and it faces two major obstacles: "stock and flow" and "conservative forces".

The "stock and flow" means that it takes a long time to replace products from the old way of doing things with products from the new way. For example, if all cars sold today would be self-driving electric cars, it would still take about 20 years before all cars have been replaced. Another example is mobile telephony, which is offered to consumers since the 1980s. The adoption of mobile technology has been slow at first, and has gained momentum only in recent years. According to the Swedish Post and Telecom Authority (PTS), about 15 % of people only had a mobile phone in 2009. The proportion has doubled in five years, to almost 30% by 2014. This means that 70 % of people still feel the need to stick to an 1800-century technology.

The other factor that may prevent or slow down the transformation process is "conservative forces". It is not uncommon for companies and unions that are challenged by new technologies to obstruct the new technology. A historical example is the Luddites in England who smashed mechanical looms in the early 1800s. Another "conservative force" is legislation that is not adapted to the new technology, so it is likely to affect development negatively.

The digital economy takes over

The digital economy takes overOverall, one can conclude that societies change and evolve when "the new" challenge "the old". The introduction and adoption of new technology can take time, since many factors must be in place, but the development does not stop. It is also important that laws and other restrictions do not challenge developments. Today, there are many indications that digitization is transforming more and more areas because many factors are in place.

In many industries, digitization is on the acceleration point on the classic S-curve, which is usually used to illustrate how new services, products and technologies are emerging. This means we will see how digitization changes the way goods and services are produced, delivered and consumed in more and more areas.

That is why the first 10-15 years of the 2000s must be seen as when the digital economy fully came to replace the analogue.