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Creating economic growth from the third industrial revolution

Fred Ledley

Business innovation has a problem. A recent working paper by Robert Gorden titled “Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” suggests that “innovation does not have the same potential to create growth in the future as in the past.”

Want a good example? Consider the most talked-about advertisement “teaser” leading up to this year’s Super Bowl titled “Kate Upton Washes the All-New Mercedes-Benz CLA in Slow Motion.” It is impossible to watch this advertisement without asking: “what’s new?”

A recent article in examined the “hottest new car features” and “killer-apps” for 2013, which included backup collision intervention and sensors to alert the driver when the car ahead moves forward, front-center mounted airbag, hands-free power lift gate, pushbutton gear selector, text messaging assistant, heated wiper blades and washer fluid, advanced multi-media controls and displays, and an integrated Wi-Fi hotspot. While AI-based accident avoidance systems certainly constitute an important innovation, little else is really new. The 1958 Edsel had push button transmission, the integrated media and communication tools duplicate those already in most people’s pockets, and, as for being alerted to the movement of cars ahead, the author of the Forbes article noted that the “taxicab driver sitting behind us at a stoplight performs the same function by blowing his horn.” 

This list of does not include many of the most remarkable technologies that are emerging from university and industry research centers such as:

  • Self-driving cars
  • Hydrogen powered vehicles
  • Self-healing materials for auto bodies and finish
  • Airless, puncture-proof tires
  • Water and dirt repelling windshields and finish
  • Vehicle-infrastructure integration
  • Platooning
  • Mobility on demand

These innovations will provide the killer-apps for the future. Or will they?

Gorden’s recent paper suggests that we can no longer take such progress for granted. He argues that the contemporary revolutions in computers, the web, and mobile phones - what he calls the “third industrial revolution” — has not had the same impact on economic growth as the first industrial revolution (steam, railroads) or the second (electricity, internal combustion engine, communications, chemicals, petroleum). He argues that the disconnect between innovation and economic growth can be explained by contemporary headwinds, including the demography of the post-baby boomer era, deteriorating education, rising inequality, globalization, energy/environment, and accumulated debt.

As an entrepreneur, I am troubled by the central theme of Gorden’s work, namely that innovation no longer has the potential to create economic growth. It doesn’t have to be that way.

The driving force of innovation is the relentless, exponential progress of science and technology, exemplified by “Moore’s Law” — the doubling of computer power every 18-24 months. Futurists such as Ray Kurzweil, Michio Kaku, and our own work at Bentley’s Center for Integration of Science and Industry suggest that this exponential growth of science is characteristic of the scientific enterprise, not simply our times.

The challenge lies in developing business models that can translate science into economic value. Business models have been described as “a focusing device that mediates between technology development and economic value creation.” These models must continuously adapt in proportion to both the exponential progression of technology and changes in business conditions. The businesses that successfully translated the innovations of the “second industrial revolution” and social headwinds of the early 20th century into economic growth — Standard Oil, ATT, Ford, General Motors, Dow, and General Electric — also pioneered business models that were as radically different from their predecessors as their new technologies were to kerosene lamps and steam power. Contemporary society has not yet seen the same scale of sweeping, exponential change in the way businesses are organized and financed, markets are structured, or investments are valued that will be required to achieve economic growth from technological advance. As a result, modern information technologies have not yet produced the expected improvements in productivity, molecular biology has not yet provided the anticipated improvements in medicine, and nanotechnologies have not yet revolutionized automobiles or transportation.

Kate Upton strutting toward the all-new Mercedes Benz CLA in slow motion may be an effective marketing tool, but it’s also a metaphor for business models that have been unable to focus emerging technologies on real value creation.

Fred Ledley is professor of natural and applied sciences and professor of management, and director of the Center for Integration of Science and Industry at Bentley University.