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How the iPhone shows the value of innovation in a capitalist economy

Ten years of watching the iPhone transform markets around the world demonstrates the economic value of technology innovation

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A decade on from the launch of the iPhone it’s worth having a look at the wider effects of the smartphone gizmo itself. It is, for example, the fastest adopted technology of all time – sales were perhaps 1.2 billion pieces last year; one estimate has 30% of the global population with a working and connected handset sometime during this year.

The only technology that comes anywhere close to this sort of roll-out is what we now call the dumb phone, even though we all thought that was pretty whizzy only 30 years ago.

Over in the halls of academe the economists are still arguing about this – Mariana Mazzucato insists that as all the component technologies were government backed it was really the state which created the iPhone. This rather misses the standard analysis, which is that government is just as good at invention as the private sector, and terrible at innovation compared to it.

The smartphone was indeed cobbled together from extant technologies, that’s what innovation itself is. The reason the market sector does so well at innovation being that in one view that’s just what it is – an experiment machine. Technology does march on, tastes do change, and what can be done and what people want done therefore vary over time. It’s precisely because millions try to sate desires with those new technologies that we quickly sort through what, among the possibilities, people want to be done.

Making the poor rich

Over in another of the ivory towers the effect of the smartphone, rather than its genesis, is agreed upon – it’s making the poor rich. Here we mean the truly poor, those billions out there in developing lands. Much of what we actually know comes from just mobile phones – we project those results onto the smart kind. From those dumb ones we find that just 10% of the population having one grows GDP by 0.5% annually. Not an extra 0.5% on top of whatever growth, but a full half a percent of more GDP each year.

The classic example of how this occurs is the unlikely subject of sardine fishermen off Kerala in India. Radios were too expensive for people at near subsistence level, so those out on the boats didn’t know which port markets still had buyers, which were short of stock and so on. A method of communication allowed this information to filter through and the end result was higher wages and lower costs for the fishermen in fuel and so on, lower prices to consumers. This is a pure efficiency gain, the Holy Grail of economics.

Other research in even poorer areas has shown that communications allows contracts to complete. This is jargon, yes, but it ties in with that bit that most of us find hard to swallow about introductory economics, that markets work with perfect information.

Given that information flow never is perfect then some of us don’t believe that the system is thus efficient. But that’s not quite the point – if information flow becomes more efficient then markets will work better. The guy on this side of the hill with the hungry goats now knows about the forage for a fee available on the other side of it, and the transaction can thus happen.

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We do project a bit from this to the idea that smartphones, and the associated internet connections, are going to have the same or greater effects. Places with an absence of a landline network benefit from basic mobiles, places without libraries – that other form of information flow – are going to benefit from the internet.

It would be a brave person who would quantify this overall but this past 40 years has seen absolute poverty, the $1.90 a day of peasant destitution, fall from 40% of our species to just under 10% today. The fastest fall in poverty in the history of the species, in fact. Just as some part of globalisation was purely technological – the invention (or innovation) of the shipping container plus cheaper flights and telecoms – rather than legal or political, so too this fall in poverty is in some part purely technological, the result of cheap telecoms for the masses.

Making things cheap

This brings us to one unassailable fact about this oddity of capitalist free marketry. Maybe it does need government aid to invent – certainly it needs government to moderate and regulate it. But what it really does is make things cheap.

Remember, iPhone launched at $500 plus the network contract cost, and any of us can buy Landfill Android today at a fraction of that, with the newer performance far outranking the old. Why this happens was explained by Adam Smith himself. Capitalists – not in quite these words – are both lazy and greedy. So, when they see someone else making “super profits” above the general level of profit in the economy, they all pile in to get some.

The subsequent competition means prices to us fall precipitately and the profit level in this new field similarly. For several years, Apple and Samsung had more than 100% of the profits of the entire sector, everyone else making losses as hardware prices fell through the floor.

Joseph Schumpeter made the same point, that Queen Elizabeth I had silk stockings, we know who gave her a pair, but it took the Satanic Mills to make them available to every factory girl. The same effect led William Nordhaus to calculate that the entrepreneurs, the innovators, keep only some 3% of the value created. The rest of it flows to us, the consumers, in what is known as the consumer surplus – the value to us over and above the price we must pay for it.

It’s a rather unlovely thought that part of our economic system, capitalism, is driven by the base motive of greed for profit. It’s the other part of it, those markets and their competition, which lead to why it makes the rest of us so rich. For the combined system does one thing extraordinarily well – it makes things cheap in short order.

In 2007 the iPhone was $500; today no one makes anything that feeble and entry prices are still only, what, $20? That’s not a bad recommendation for an economic system, really.

This was last published in July 2017

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