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Recapitulation: nonlinearity and gain

  Debt leverage is linear: it magnifies the gain or loss resulting from an investment of a given size. Inherent leverage is nonlinear but continuous: it exploits nonlinearities in the price/value curve of an investment to produce gains, often without the carrying costs or symmetrical downside risk of debt leverage. Technological leverage is not only nonlinear but is often discontinuous: the introduction of new technologies can cause discrete jumps in the economic fundamentals of a business, an industry, or an entire economy.

The experience of the last two decades of technological innovation, exemplified by Moore's law of semiconductor pricing, the exponential growth of computing power at constant cost, and the manufacturing, product cycle, and investment consequences of the replacement of machinery with software, bear witness to the power of technological leverage, the rewards that accrue to those who employ it to their benefit, and the risks to those who ignore it.

Debt leverage carries with it the risk of bankruptcy. Technological leverage bears the risk of obsolescence. Those who profit by technological leverage are running on a treadmill whose speed increases as technology advances. To fall behind is to be cast out of the game with little hope of re-entering as the pace continues to accelerate. Unlike debt leverage, technological leverage poses a ``keep up or give up'' choice to businesses, as the makers of mechanical calculators and watches learned too late.

Editor: John Walker