The Innovation Paradox Undermining the Digital Revolution: How Magical Technology Isn't Translating into Miraculous Economic Progress

It’s the most curious paradox of today’s digital revolution. While the computers, the internet, smartphones and AI all appear magical, they haven’t actually translated into equally magical economic progress. That, at least, is the counter-intuitive argument of the Oxford economist Carl Benedikt Frey whose new book, How Progress Ends, suggests that the digital revolution isn’t resulting in an equivalent revolution of productivity. History is repeating itself in an equally paradoxical way, Frey warns. We may, indeed, be repeating the productivity stagnation of the 1970s, in spite of our technological marvels. Unlike the 19th-century industrial revolution that radically transformed how we work, today's digital tools—however impressive—are primarily automating existing processes rather than creating fundamentally new types of economic activity that drive broad-based growth. And AI, by making existing work easier rather than creating new industries, will only compound this paradox. It might be the fate of not just the United States and Europe, but China as well. That, Frey warns, is how all progress will end.

1. The Productivity Paradox is Real Despite revolutionary digital technologies, we're not seeing the productivity gains that past technological revolutions delivered. It took a century for steam to show its full economic impact, four decades for electricity—but even accounting for lag time, the computer revolution has underperformed economically compared to its transformative social effects.

2. Automation vs. Innovation: The Critical Distinction True progress comes from creating entirely new industries and types of work, not just automating existing processes. The mid-20th century boom created the automobile industry and countless supporting sectors. Today's AI primarily makes existing work easier rather than spawning fundamentally new economic activities.

3. Institutional Structure Trumps Technology The Soviet Union succeeded when scaling existing technology but failed when innovation was needed because it lacked decentralized exploration. Success requires competitive, decentralized systems where different actors can take different bets—like Google finding funding after Bessemer Ventures said no.

4. Europe's Innovation Crisis Has a Clear Diagnosis Europe lags in digital not due to lack of talent or funding, but because of fragmented markets and regulatory burdens. The EU's internal trade barriers in services amount to a 110% tariff equivalent, while regulations like GDPR primarily benefit large incumbents who can absorb compliance costs.

5. Geography Still Matters in the Digital Age Silicon Valley's success stemmed from unenforceable non-compete clauses that enabled job-hopping and knowledge transfer, while Detroit's enforcement of non-competes after 1985 contributed to its decline. As AI makes many services tradeable globally, high-cost innovation centers face new competitive pressures from lower-cost locations.

Keen On America is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.