The headquarters of Alphabet’s X labs in Mountain View, California, is easy to miss. A simple yellow “X” marks the visitors’ entrance to the sprawling building that was once a large indoor shopping mall. But on a weekday in late May, the parking lot is bustling, filled with employees and visitors, as X’s pod-like driverless cars buzz about. Inside, various teams of mostly young people—the company won’t say just how many people are employed at the facility—work on “moon shots,” which Alphabet defines as transformative technologies that could have a huge impact on the world. Besides the driverless cars, publicly identified projects at X include Loon, an effort to use high-altitude balloons to deliver the Internet to remote regions of the world; Wing, which is building self-navigating drones for delivering stuff; and Makani, which is developing odd flying wind turbines tethered to a ground station.

Inside, skateboards, bikes, and scooters are everywhere, as are machine shops and expensive analytical instruments. This postmodern industrial research center—part design studio, part tech incubator, and part science lab—represents Silicon Valley at its best: ambitious, creative, and fixated on radical new technologies. And while X may have been widely ridiculed for its failure to convince the world that people needed its Google Glass, its remarkable progress with driverless cars—which are common enough on the surrounding streets of Mountain View to attract little notice—could make us forget such missteps. But Alphabet’s X, with its heavy investment in resources and people, also reminds us just how difficult it is to commercialize radical new technologies and how few companies can afford such efforts.

Given impressive advances in artificial intelligence, smart robots, and driverless cars, it’s easy to become convinced that we are on the verge of a new technological age. But the troubling reality is that today’s advances are having a far from impressive impact on overall economic growth. Facebook, Twitter, and other digital technologies undoubtedly bring great value to many people, but those benefits are not translating into a substantial economic boost. If you think Silicon Valley is going to fuel growing prosperity, you are likely to be disappointed—or you’d better be patient. While the high-tech industry creates impressive wealth for itself, much of the country is mired in a sluggish economy. It might be that driverless cars and other uses of advanced AI will eventually change that, but for now these technologies are not radically transforming the economy.

Economists who study productivity, a measure of output per worker, tell us that from around 1994 to 2004 the Internet and advances in computation helped fuel rapid growth. But during the past decade we slid back to far slower improvements in productivity, hence stagnant economic growth. And the phenomenon is showing up in advanced economies around the world, with countries such as Italy and the U.K. particularly hard hit. Many people feel the results as flat or declining wages, and the consequences have almost certainly contributed to deep political unrest in many countries. According to Chad Syverson, an economist at the University of Chicago Booth School of Business, U.S. productivity grew at a mere 1.3 percent per year from 2005 to 2015, far less than the 2.8 percent annual growth rate during the decade earlier. Syverson calculates that had the slowdown not occurred, the gross domestic product would have been $2.7 trillion higher by 2015—about $8,400 for every American.

No one really knows the reason for the slowdown. Perhaps we have run out of ideas that match the great inventions of the 20th century in economic importance (see “Tech Slowdown Threatens the American Dream”). Or perhaps we haven’t done a good job measuring how recent advances in digital technologies and social media have affected the economy: if Facebook, YouTube, and Twitter are making us more productive, we don’t know because we can’t tally the true value of this free stuff. That’s possibly true, but even if it is, it doesn’t account for anything close to the measured slowdown in overall productivity growth. A more plausible explanation: it is proving difficult to convert recently developed digital technologies into meaningful changes in the economy’s largest sectors, such as health care, manufacturing, and transportation.

Even some of the strongest proponents of the idea that automation and digital technologies are going to revolutionize our economy are dismayed by the slow progress in implementing these advances. Erik Brynjolfsson, a professor at MIT’s Sloan School of Management and coauthor of The Second Machine Age, says the process has been “disappointingly difficult.” He says that while there has been “a lot of progress in the underlying technologies” in the last few years, companies are finding that making the necessary changes is expensive and takes time. “It’s not trivial. It’s not like flipping a switch,” says Brynjolfsson. “And companies are struggling.”

Michael Mandel, an economist at the Progressive Policy Institute in Washington, D.C., says the productivity slowdown is occurring in what he calls the physical industries, including manufacturing and health care. Such industries, which he estimates make up 80 percent of the national economy, account for only 35 percent of investments in information technology and their productivity reflects that, growing at only 0.9 percent annually. Meanwhile, productivity is growing by 2.8 percent a year in what Mandel calls digital industries, which include finance and business services.

If that is what is going on, it leaves plenty of room for optimism. “As we learn to apply the new technologies,” says Mandel, “we could see growth in productivity speed up again.” Syverson agrees that while the IT gains of the late 1990s and early 2000s seem played out, he can “imagine a second wave.”

A material world

Our list of 50 Smartest Companies includes some that have used new digital technologies to destroy existing industries: Amazon, with its growing dominance of retail trade, and Facebook, with its inroads into the media. But it also includes examples of mature companies, like Bosch, a large German manufacturer using IT to meet its business challenges (we go to Allgäu, Germany, to visit a “factory of the future”). And it includes those pushing the limits of new digital technologies, as Baidu is doing in its effort to create autonomous cars and Alphabet with its remarkable advances in artificial intelligence. 

It’s a much different list from our first one, published in 2010 (it was then called the 50 Most Innovative Companies). A number of energy and materials companies on the 2010 list have failed or have become far less ambitious, or have simply made little progress in meeting their objectives. There are numerous reasons for the lack of success, but it is worth wondering whether we have lost the patience required to nurture innovation in industries that by their nature require years and often hundreds of millions of dollars to develop a commercial product.

The reality is that new digital technologies, even such impressive ones as artificial intelligence, won’t by themselves soon revive the economy, never mind solve problems like climate change. “The fact that you have cheaper computers doesn’t allow you to store energy,” says David Autor, an economist at MIT. “You can have all the computing power you want in your Tesla. It doesn’t solve the problem that the batteries are expensive, heavy, and have low energy density.” We need to solve key “bottlenecks” in such sectors as energy, education, and health care to radically improve productivity, says Autor. For example, he says, the lack of cheap energy storage is holding back deployment of renewable power and limiting the attractiveness of electric vehicles. Developing inexpensive, practical energy storage, he suggests, “would have enormous productivity importance.”

The problem is that there seems to be little commercial excitement in these areas. Our list of 50 Smartest Companies includes Aquion Energy, a Pittsburgh-based company developing batteries for storing electricity on the grid, and 24M, an early-stage startup developing a new type of battery. But compared with the 2010 list, it has far fewer startups and large companies working in materials and energy. Indeed, Mandel has analyzed U.S. government data and found that the number of employed chemists and materials scientists has significantly declined over the last few years.

Such a finding should not be surprising. More than four years ago, in a cover story called “Can We Build Tomorrow’s Breakthroughs?”, we argued that the skills and expertise that come from producing stuff are key to creating many new technologies. Silicon wafer manufacturing, for instance, is closely tied to the ability to invent new types of silicon-based solar power. In the 2012 article, we looked at whether companies in the United States still had what it took to commercialize new types of batteries and advanced energy technologies. Sadly, it turns out, many did not; several of the companies we reported on did not survive. Could it be that the loss of American manufacturing prowess has crippled our ability to commercialize radical new technologies in many industrial sectors?

Forgotten lessons

In 2010, Intel cofounder and longtime CEO Andy Grove, who died in March, wrote a prescient essay lamenting that Silicon Valley no longer builds what it invents.

“Equally important [as founding a startup] is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production,” he wrote. “This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.”

Grove was worried that Silicon Valley was no longer creating jobs as it once had. He wrote: “But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?” But he also warned about the damage to innovation that comes with the loss of manufacturing. He argued that “abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry.”

At the time that Grove wrote the essay, he was contradicting much of the prevailing wisdom that the loss of manufacturing didn’t really matter, as long as the high-value “knowledge work” stayed in this country. But what he wrote “was absolutely true,” says Willy Shih, a professor at Harvard Business School, “and lots of people are now realizing it.” Indeed, he says, Grove was just reminding us “what we had all been taught as engineers in the 1980s.” The real question, says Shih, is “what caused everyone to forget it.”

Grove’s essay is a poignant reminder that our economic fate is still intimately tied to “old” industries like manufacturing, and that creating jobs still matters. Digital technologies could greatly help in many sectors if businesses adopt them more fully; using software and the Internet to improve the efficiency of health care alone would have an enormous impact on the economy. But we’ll also need to invent and deploy innovations beyond digital technologies, in materials, 3-D printing, genomics, and energy.

That’s one reason it’s worth watching the success of Alphabet’s X. The leaders of the lab realize that to truly solve large problems, it needs to go beyond the software strengths of the parent company. Indeed, X prides itself on its hardware expertise and its focus on materials and engineering. In projects like its autonomous cars, the digital and physical worlds meet up.

When X selects its moon shots, one of its criteria is that the advance could affect at least one billion people, says Obi Felten, whose official title is “head of getting moon shots ready for contact with the real world.” That means working with companies in health care, transportation, the car industry, and telecommunications. “I’m a cautious tech optimist,” says Felten. “In health care, for instance, I have no doubt technology is going to make a big difference. But it’s not going to be as fast as people think.”

The success of X will depend not only on its engineering creativity but, perhaps more important, on how well it understands what different industries need and what consumers want. (The failure of Google Glass is fresh on everyone’s mind.) The venture capitalist Peter Thiel captured much of the criticism of Silicon Valley when he said, “We were promised flying cars, and we got 140 characters.” He’s right to question the lack of ambition in much of the tech industry, but the quote also betrays a distracting bias. Most of us don’t in fact have any desire or need for flying cars. We would gladly settle for a healthy economy and more well-paying jobs. That will take some true “moon shots.”