Here is the way things are supposed to work. Every 50 years or so, the world goes through a major technology-based economic revolution, - also known as Kondratiev Waves. A new disruptive technology emerges out of the lab into the marketplace, becomes increasingly successful, gets embraced by entrepreneurs who start new businesses based on these new technologies, and begins to gain market share at the expense of the previous, slow moving market leaders. These new ventures continue to attract more and more financial capital from investors, which in turn helps improve the quality and lowers the cost of the new disruptive technology and leads to many new innovative applications.
But inevitably, the investments in new companies and applications turns into unsustainable speculation, leading to a financial bubble which eventually crashes.
Then, after the crash, comes a time of institutional recomposition. The now well accepted technologies become the norm. New paradigms emerge for guiding innovation and for determining winners and losers in the marketplace. Over time, these new paradigms significantly transform the economy and everything around it, as well as re-shaping social behavior and the institutions of society. The previous decades of creative destruction now become a golden age of creative construction.
According to Perez, over the past couple of centuries we have had such a technology-based economic and societal revolution every 40 - 60 years, starting with the Industrial Revolution in 1771, which was characterized by the emergence of machines, factories and canals. This was followed by the age of steam and coal, iron and railways which started in 1829; steel and heavy engineering starting in 1875; and the age of the automobile, electrification and radio in 1908. Our present information technology and telecommunications age, whose starting point Perez pegs at 1971, is the fifth such major revolution in that span.
In a recent article, After Crisis: Creative Construction Perez writes about our most recent bubbles:
“. . . this time we have had the boom and crash in two episodes. The first was the Internet mania which was truly fuelled by new technology and ended in the NASDAQ collapse of 2000. The other was the set of easy credit bubbles of 2003-08, when investors were pushed by an abundance of quasi-free money into finding anything but technology as an object of speculation (from commodity futures to securitized sub-prime mortgages). The enormity of this financial bubble was facilitated by the process of globalization and the capacity for computer-aided financial "innovation" acquired during the NASDAQ boom. . . ”
She concludes her article on a hopeful note that, as with the previous four technology-based revolutions, another golden age of innovation and production will follow in the decades ahead:
“Ultimately, the length and depth of the global recession (perhaps depression) will depend, not on the financial rescue packages but, to a much greater extent, on whether the wider measures taken are capable of moving the world economy towards a viable investment route with high innovation potential. The technological transformation that occurred during the past few decades has already provided the means for unleashing a sustainable global golden age. The environmental threats offer an explicit directionality for using that creative potential across the globe in a viable manner. The major financial collapse has generated the political conditions to take full advantage of this unparalleled opportunity. It is everybody's responsibility to make sure this possibility is not missed.”
But, others are not so sure. In a provocative new book, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better, economist Tyler Cowen warns that perhaps things might be different this time around.
The Economist offers a very good summary of the key points in Cowen’s book:
“There are two kinds of economic growth possible in this world. One can take good ideas already in use elsewhere, adopt them, and make use of underused stocks of people and capital. That's what China and India are currently doing, and we shouldn't mistake their rapid growth for something it's not. Or one can come up with new ideas and apply them in ways that allow the economy to grow.”
“The rich world has been stuck doing the latter for most of the last century, and lately they haven't been doing it as well. Mr Cowen looks at growth rates of output and median income over the last few decades and notes that there's a steady downward trend. And this trend is due, he says, to the exhaustion of the supply of low-hanging economic fruit.”
The low hanging fruit, in Cowen’s opinion, is driving the growth in emerging economies, as it did in advanced economies like the US in the 19th and 20th centuries. It includes education, cheap land, high yielding farms and mines, and the many new jobs that were created in the rapidly industrialized economies of the past two centuries, which were filled by waves of immigrants.
“But the big setback for society, according to Mr Cowen, is the end of the exploitation of the major innovations of the last two centuries. The 1700s and 1800s yielded revolutionary innovations in industry, chemistry, and electricity. Rich countries spent the 1800s and 1900s figuring out how to exploit those innovations to their fullest, and as recently as the 1950s and 1960s, these experiments were producing products that utterly changed the way people lived . . . But with a few exceptions (among them computers, on which more later) today's households don't look that much different from their 1970s counterparts. Products have improved, but the development of revolutionary new technologies has slowed substantially. The progress of technology has plateaued.”
To many of us, this point of view is surprising, if not downright shocking. Aren’t we in the early stages of a massive digital technology revolution that is having a huge impact on every aspect of business, society and our personal lives? No one, including Cowen disputes that. However, this digital revolution is different from the previous four that Carlota Perez writes about. The major disruptive innovations of the past two centuries were physical in nature, - steam power, machines, railroads, electricity, cars and airplanes. They led to the formation of many new industries, factories and jobs.
However, our digital technology revolution feels different. Over the past two centuries, we achieved major productivity and quality improvements in the agricultural and industrial sectors of the economy through the innovations made possible by the huge advances in technology, science and engineering. We are in transition now from the industrial economy of the past two hundred years, to an information, services-based, knowledge-oriented economy.
Digital technologies are now enabling us to apply technology, science and engineering to the services sector of the economy, which accounts for close to 80 percent of the jobs in the US, the UK and other advanced nations. Over time, we can expect major technology and productivity improvements in such information-intensive, services-based industries, including finance, distribution, media, health care, education and government. If we achieve anywhere near the productivity in service jobs that we have achieved in industrial jobs over the past hundred years, where will the new jobs come from? Cowen is not optimistic.
“The internet, on which he has a lot to say, has had enormous benefits, but a striking amount of online activity is free and internet businesses create few new jobs (and displace lots of others). The result is growth in utility without much of a contribution to GDP, which would be fine except that countries and people have bills to pay, on things like health care, pensions, and government debt.”
The reason these arguments strike a chord in us is the jobless recovery we have been going through in the US over the last few years. Two major factors are driving this jobless recovery. One is the aforementioned IT-based productivity surge, which has already resulted in major innovations and efficiencies over the past decade. It took a while, but companies finally learned how to take advantage of these technology advances to significantly re-engineer their processes and restructure their organizations. Companies are finding that they can get the same work done with significantly fewer people.
The second factor is globalization. This is not just a case of companies moving jobs overseas in search of lower costs. Increasingly, it is also a matter of companies investing where the demand is highest. Many US-headquartered companies are truly global, doing business all over the world. They are cutting jobs in the US and other countries where demand is weak, while adding jobs in the booming emerging markets.
While business conditions have significantly improved in the US, unemployment remains high as a result of this jobless recovery. What will the future bring? Are we facing a long term Great Stagnation, as Tyler Cowen and others believe? Are we seeing the end of The American Dream - the possibility that anyone can get ahead and achieve success and prosperity through talent and hard work?
Or, are we now in a transitional period of institutional recomposition, where our economy, government and society in general are going through major structural changes caused by the digital technology revolution and the forces of globalization? Will this transitional period be eventually followed by a global golden age of productivity, innovation, new job creation and creative construction, as was the case in the previous four technology-based revolutions of the past couple of centuries? How long will such a transitional period last?
Clearly, no one knows the answers to these very important questions. We can only speculate within a wide range of points of view, some more pessimistic, others more optimistic. Given my inherent faith in the powers of innovation and technology, as well as in globalization and open markets, my personal views fall on the optimistic camp. Let me briefly summarize some of the reasons why I remain hopeful in the future.
First of all, there is massive innovation going on all around us. Digital technologies continue to advance at a prodigious rate, as do many other technology and scientific innovations. Whole new industries are rising up around us, from nanotechnologies to the search for clean, plentiful energy; from bioinformatics to smarter industries of all sorts. It is hard to imagine that all these innovations will not result in many new kinds of products, services and jobs, most of which we can barely begin to imagine today.
Second, the very globalization that is a leading cause of our present jobless recovery is welcoming billions of people around the world out of poverty. The world’s population is now roughly 7 billion people, and is predicted to grow to around 9 billion by 2050. All those billions joining the world’s economy, now and into the future, will become consumers of our innovations, products and services, potentially leading to many new kinds of jobs in such an integrated global economy.
Finally, the very nature of jobs, companies and work itself is in the process of changing. The 20th century was a period of rapid industrialization that saw the rise of many new vertically integrated companies, which were needed to master the new means of production and distribution. Many of those hierarchically organized companies became bureaucratic as they grew bigger. They moved too slowly to embrace new innovations because they were trying to protect the sources of their past successes and profits, and were done in by the entrepreneurial forces of creative destruction.
Given the pace of change all around us, I believe that we are becoming a far more entrepreneurial society. Large companies are still needed to handle highly complex projects, as well as those requiring sophisticated R&D and global integration. But in today's environment, such large firms can only exist if they combine their scale with the agility needed to keep up with technology and market changes.
But, the vast majority of jobs in our new global economy will be far more entrepreneurial in nature, involving groups of individuals and small businesses. Digital technologies are giving these new waves of entrepreneurs access to technologies, skills, administrative capabilities and global reach that were previously only available to larger companies. Such a transition to a more entrepreneurial, global economy will likely be one of the most important factors in job creation over the next several decades.
I am hopefully that over time we will see the emergence of a 21st version of The American Dream, as well as the equivalent versions of such dreams in India, China, Africa, Latin America, Europe and any other countries and regions hungry enough to achieve prosperity and success through talent and hard work. That is about all we can expect from the future. Ultimately, it is up to us to help bring about this more hopeful version future.