How to think about the future

This is the view of Ray Kurzweil, an American inventor best known for making seemingly outlandish predictions about future technologies. Although few of his forecasts extend 100 years ahead, they have been remarkably accurate; since the 1990s, around 86 per cent of Mr Kurzweil’s predictions about profound technological change have been proved right.

Assuming his track record continues, the 2020s should herald some remarkable breakthroughs. We can expect nanobots to eliminate most diseases, nano-systems to replace normal human eating, and autonomous vehicles to take over the roads, leading to humans being banned from driving. In the 2030s, Mr Kurzweil thinks virtual reality will become indistinguishable from real life, and that we will develop the ability to upload our minds to the web.

Science historian and veteran BBC broadcaster James Burke has suggested that the world ahead of us could be even odder. In around 50 years’ time, Mr Burke believes advances in nanotechnology could democratise “personal nano-factories” that would allow someone to produce any physical substance – cake, trousers, even smaller molecular machines – from their garden shed, waste-free. Artificially intelligent nano-computers the size of a dust particle will look after us, programming our immediate environment, thereby ending scarcity.

Such wild scenarios go beyond most investors’ time horizons – let alone imaginations struggling to envision life beyond the Covid-19 pandemic.

But in many cases, these scenarios are extrapolations of exponential improvements and convergences in existing technological fields. In other words, futurists are often just tracing out observable trends in cost, technical efficiency, computational power and materials science to plot out likely dates for broader market adoption of today’s science fiction.

Save for some notable concerns about artificial intelligence and robots gone awry, this techno-utopian vision is one of rising possibility and progress. What’s more, it doesn’t even require perfect economic or social conditions. Acolytes of Moore’s Law – the observation of Intel (US:) founder Gordon Moore that computer processing power simultaneously doubles and gets cheaper every two years – will point out that the trend has been largely uninterrupted by massive global events, and instead slot in to an unstoppable arc of progress.

“Moore’s Law was not the first, but the fifth paradigm to provide accelerating price performance,” writes Mr Kurzweil in The Law of Accelerating Returns. “Computing devices have been consistently multiplying in power (per unit of time) from the mechanical calculating devices used in the 1890 US Census, to Turing’s relay-based ‘Robinson’ machine that cracked the Nazi Enigma code, to the CBS vacuum tube computer that predicted the election of Eisenhower, to the transistor-based machines used in the first space launches, to the integrated-circuit-based personal computer which I used to dictate this essay.”

Investing in an accelerating world

For investors, it can be hard to know what to do with this profound techno-optimism. On a basic level, a global economy of shattered paradigms feels even less predictable and riskier than the one currently humbled by a single-stranded RNA virus. And while the history of investing has always meant backing technological development, many of the exponential changes that the Kurzweils of this world talk about threaten concepts as fundamental as employment, longevity and consciousness. The future is not just an unending era of ever-sharper iPhone cameras.

Such a reaction will be familiar to anyone who reads The Future is Faster Than You Think, the latest contribution to the futurist field from Kurzweil associate Peter Diamandis and journalist Steven Kotler. Released in January before the virus took hold, and with a broadly optimistic tone, the book chronicles the way converging technologies are transforming industries and society.

On the one hand, Messrs Diamandis and Kotler point to plenty of game-changing technological developments that investors can already back. One is biotechnology group United Therapeutics (US:UTHR), led by serial entrepreneur Martine Rothblatt, which is working to create an unlimited supply of transplantable organs by the end of the decade. IBM (US:IBM) is cited as one of several tech giants honing quantum computing, which we are told will usher in a “golden age of discovery in new materials, new chemicals, and new drugs”. Even heavily lossmaking ride-hailing app Uber (US:UBER) gets dozens of mentions for its bombastic plans to bring flying cars to the world’s urban environments.

One also comes away with the impression that much of the innovation will be the preserve of the existing tech oligopoly. The book contains 68 references to Google or its parent company, Alphabet (US:GOOG). Amazon (US:AMZN) gets 40 mentions, while Apple (US:AAPL) is referred to 23 times. These companies are highlighted as much for their innovative strengths as their destructive power, best exemplified by Amazon’s brutally-fast victory over the traditional bricks-and-mortar model of retail.

It helps to explain why a handful of tech stocks have in recent years become the most hyped and widely followed earnings growth story in town. The rise of the so-called FAANGs – despite their increasingly-stretched valuations – goes a long way to explaining the S&P 500 Index’s (SPY) Teflon-like resilience to dreadful economic data.

If these companies are the greatest font of innovation, there’s a widely-accepted view that investors with long-term horizons should ignore valuation quibbles and simply commit their capital. Faced with a bewildering outlook for monetary policy and the real economy, the argument that today’s winners are tomorrow’s winners is powerful.

A knowable future

Others are less bullish. Robert Gordon, an American economist at Northwestern University, is in the techno-pessimist camp. He argues that economic growth of the last few years has been driven largely by rising employment, and that falling productivity – measured by output per capita per hour – suggests that we are not living through an era of profound and ever-accelerating technological change.

To illustrate his point, Mr Gordon offers a historical thought experiment. In his book The Rise and Fall of American Growth, he imagines an individual who takes a nap in the 1870s and wakes up at the dawn of the second world war. The profound technological shifts during that time – the internal combustion engine, electricity, telecommunications and the earliest computers – would all be unrecognisable to the bleary-eyed sleeper. By comparison, an individual who took a nap in 1939 and woke at the dawn of the 21st century would only be truly unfamiliar with the microwave oven.

Where Silicon Valley sees a world of abundant exponential technological improvements, Gordon sees only stasis. Offices use desktop and laptop computers, much as they did 15 years ago; despite leaps forward in e-commerce, the retail supply chain still requires lots of humans; the materials and techniques used in construction and home maintenance are little changed; the age of robots has been largely confined to manufacturing and warehouses.

Mr Gordon also thinks the era for technology’s most positive effect on Western economies is probably behind us, and that 70 per cent of US productivity gains since 1890 occurred in the half-century to 1970. Conversely, he views some of our most celebrated technological improvements of the past two decades – smartphones, ever-cheaper renewable energy and leaps forward in virtual reality – as offering negligible benefit to productive output.

Mr Gordon expects this to continue over the coming decades. Just as we can only go from rural to urban once, it is hard to improve upon the instantaneous speed with which information now travels. Demographics matter too. As our populations continue to age, deflationary pressures are unlikely to abate, as growth dwindles and productivity dims. Compared with Mr Kurzweil, Mr Gordon is avowedly bearish about output growth, and rather more upbeat about employment.

Hype, meet pessimism

The future will most likely be a mixture of the familiar and unfamiliar. While the techno-optimists are sometimes guilty of ignoring the complex ways in which society absorbs, accepts or rejects emerging technologies, it feels premature to argue for the death of innovation, or that the future will be static. Change is constant, uneven and unpredictable. Plus, technologies do not have to boost economic productivity on a per-capita basis to be desirable or highly investable.

It is also important not to confuse well-founded reasons for pessimism with inexorable and often uneven shifts in technological change. Because humans tend to think about the impact of technology in a linear way, we often fail to recognise breakthroughs when they occur. In investing terms, that can mean a failure to spot winners.

Renewable energies have provided a classic example of this tendency. Over the past decade, the investor debate around wind and solar has often focused on intermittency issues and the slow-moving and seemingly immovable nature of the current fossil fuel-led energy industry.

Meanwhile, wind and solar output has grown exponentially as production costs for both technologies have cratered and engineers have shown that projects can be scaled in ways that fossil fuels will never be able to match.

What’s more, the development of renewable energy technologies – especially solar – follow a clear learning curve, and a principle known as Wright’s Law. First identified by the US aeronautical engineer Theodore Paul Wright, the law states that every doubling in the cumulative scale of a technology’s production will lead to a fixed percentage decline in the cost of the technology. A textbook example of this was the Model T Ford, which exhibited a 16 per cent decline in cost per unit between 1909 and 1923. During that time, cumulative production climbed from 20,000 to almost eight million.

By comparison, solar power has exhibited a 30 to 40 per cent learning rate for every doubling in installation. What might these mean for future costs, even if we assume a conservative growth rate? Ramez Naam, of the Kurzweil and Diamandis co-founded Singularity University, reckons that by 2040 even the most expensive solar energy will be below the operating costs of even the cheapest existing fossil fuel plants. Energy investors of every stripe, take note.

Measuring runaway change

For all their impacts, it can be hard to see these currents in action.

To the late American futurist Roy Amara, this phenomenon was explained by the adage – “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”, which we now know as Amara’s Law.

“We’re now in this trough of disillusionment when people underestimate the impact of implying many technologies,” argues Martin Davis, chief executive of Draper Esprit (GROW), an Aim-listed venture capital group that invests in fast-growing technology companies. “To take advantage of the two billion who are unbanked, you don’t need quantum computing. That’s the next wave of technology which is probably a little bit overhyped today; the real opportunity is the things that were overhyped 15 years ago, like data and the internet of things.”

Unfortunately for investors, looking past near-term disillusionment is easier said than done. Particularly for companies focused on a moon-shot, the heavy costs involved in developing a game-changing technology – often before a mature market for that technology has emerged – can compound the pessimism.

A classic example of this is Aim 100 constituent Ceres Power (CWR), whose patented hydrogen fuel cell technology has dazzled investors with its promise ever since the group listed in 2005. Neither was Ceres short of big-name believers in its technology, having signed development deals with British Gas, Rolls Royce and EDF Energy without generating a profit. But despite all the hype, the company looked to be confined to the classic example of an Aim-traded ‘jam tomorrow’ stock, repeatedly returning to investors, cap in hand, asking for more cash.

Fifteen years on from its stock market debut, Ceres is finally starting to mature into a viable investment. Not only has the market demand from the IT, real estate and electric vehicle sectors exploded, but its technology is finally starting to be used on their own or in products, including module power generators, electric buses, and combined boiler systems.

If its patent-protected SteelCells can be scaled to help solve renewable power’s intermittency issues, then Ceres could be perfectly placed at the apex of several converging technological trends. Sizeable equity investments from blue-chip names like Bosch and Weichai suggest this is now recognised at scale.

Technology vs the economy

Taken in isolation, it can be hard to reconcile the visions of Messrs Gordon and Kurzweil, and to believe that our current economic model can accommodate profound technological progress (and vice versa).

But there are some reasons for cautious and pragmatic optimism. Research by the consultancy McKinsey found that the internet created 2.6 new jobs for each one it destroyed, whilst contributing to GDP growth. Many expect a similar trend for the age of robotics and AI, and that new technologies work best when they are augmented by humans.

Added to this, recent years have brought some nascent signs that a crucial driver of innovation – research and development spending – is picking up, even if rates are well below historic highs. For evidence of growing competition between the United States, China and Europe, look no further than this metric, which according to UNESCO is growing relative to GDP.

The present crisis also presents a choice to reassess what we mean by productivity and value, and to reverse chronic under-investment in science and healthcare systems. Perhaps the Covid-19 pandemic will provide the ultimate stage for the ways exponential technology can turn past trends from precedent to historical artefact.

If this happens, then investors will need to think harder about managing the disruptive power – and opportunity – of ever-accelerating change.

 ‘The Future is Faster Than You Think’ by Peter H. Diamandis & Steven Kotler is available from Simon & Schuster