Entropy Economics

America’s oil and gas boom has been one of the biggest economic stories of the past decade. The doubling of daily US oil output and the 50 percent increase in natural gas production have transformed energy markets and are altering the geostrategic landscape. Russia, for example, is desperately lashing out, while Saudi Arabia is showing signs of an ambitious political, economic, and cultural modernization.

The US energy boom is interesting for another reason. It’s a demonstration of how the physical industries, which too often underperform their innovative potential, can boost productivity through creative use of information.

The energy industry had known about petroleum soaked shale formations for 100 years. What it lacked was a cost-effective way to pinpoint the formations and unleash and extract the oil and gas from the rock. Horizontal drilling and hydraulic fracturing were of course the key to unlocking the shale resources.

These mechanical innovations, however, were themselves made possible and perfected by infotech, such as 3D seismic modeling, cloud computing, and big data. Pinpointing the formations and the very best places to crack them took massive computer power. Guiding the drills many miles under — and then horizontally across — the earth’s surface took precision guidance systems. The data generated from the models and experiences were then refined to constantly improve the process. In so doing, oil and gas drilling today looks more like an advanced manufacturing process than the hit-and-hope, drill-and-pump process of the past.

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Several years ago, I had a bit of fun estimating how much an iPhone would have cost to make in the 1990s. The impetus was a story making the rounds on the web. A journalist had found a full-page newspaper ad from RadioShack dating back to 1991. He was rightly amazed that all 13 of the advertised electronic gadgets — computer, camcorder, answering machine, cordless phone, etc. — were now integrated into a single iPhone. The cost of those 13 gadgets, moreover, summed to more than $3,000. Wow, he enthused, most of us now hold $3,000 worth of electronics in the palm of our hand.

I saluted the writer’s general thrust but noted that he had wildly underestimated the true worth of our modern handheld computers. In fact, the computing power, data storage capacity, and communications bandwidth of an iPhone in 2014 would have cost at least $3 million back in 1991. He had underestimated the pace of advance by three orders of magnitude (or a factor of 1,000).

Well, in a recent podcast, our old friend Richard Bennett of High Tech Forum brought up the $3 million iPhone 5 from 2014, so I decided to update the estimate. For the new analysis, I applied the same method to my own iPhone 7, purchased in the fall of 2016 — 25 years after the 1991 RadioShack ad. continue reading . . .

See our commentary, with Michael Mandel, in The Wall Street Journal – Robots Will Save the Economy.

An underreported story of the last two decades is the sharp decline in the number of publicly traded U.S. firms. In 1996, U.S. stock markets boasted 7,322 listed firms. By 2015, however, that number had dropped by more than half, to 3,200. If we adjust for population, the U.S. had 2.2 public firms per hundred thousand people in 1975, but today that number has fallen to 1.1 public firms per hundred thousand people. The peak in 1996 was 2.7 public firms per hundred thousand. continue reading . . .

In his big new book on the history and future of innovation, Northwestern University economist Robert Gordon argues that information technology is a spent force. Computers and networks just aren’t as powerful as previous inventions, he argues, and the U.S. should expect another 25 years of relative stagnation. He thinks productivity growth up to 2040 will be just half our historical average, meaning tens of millions of middle-class workers will struggle to get ahead.

I’m much more optimistic. continue reading . . .