In the 1920s, Russian economist Nikolai Kondratiev observed that capitalist economies go through long term cycles of booms and depressions every 50 years or so. These economic cycles became known as Kondratiev Waves. More recently, Carlota Perez expanded on Kondratiev’s work, describing the central role of technological revolutions, disruptive innovations, and financial and production capital in these economic cycles.
Perez identified five such technology-based revolutions and economic cycles since the onset of the Industrial Revolution in 1771, the first one being the age of machines, factories and canals. This was followed by the age of steam and coal, iron and railways starting in 1829; steel, electricity and heavy engineering in 1875; the age of oil, the automobile, and mass production in 1908; and our present age of digital technologies, information and telecommunications which Perez pegs as starting in 1971.
In each of these cycles, unrealistic expectations in the new disruptive technologies led to over-investments in new companies. This eventually turned into unsustainable speculation, causing a financial bubble, which eventually crashed and resulted in a period of economic stagnation.
In the past four cycles, once the impact of the financial bubble and economic stagnation worked themselves out, a golden age of innovation and production followed, where new paradigms based on the new technologies significantly transformed the economy and just about every single industry, as well as re-shaping the institutions of society, and the nature of work, government and even people’s personal lives.
But now, given our jobless recovery and continuing slow growing economy in the US, we are pondering whether we are once more at the onset of a new golden age of innovation, or at the beginning of something different which will become known as The Great Stagnation. While I am hopeful that technology, innovation and globalization will eventually lead to all kinds of new jobs, a much improved economy and a higher standard of living, none of us really knows which of these two scenarios will prevail in the future.
Agriculture was the key to the rise of sedentary human communities, and led to agrarian societies which were the main form of socio-economic organization for most of recorded human history. More and more people settled in communities which over time grew into villages, towns, cities and nations. As the communities grew, the need for more structure led to the development of different kinds of governing institutions, including monarchies, feudalism and organized religions.
The transition to an industrial society started in the 18th century, largely driven by advances in science and technology. These advances in turn led to mass production and the division of labor; large, increasingly urban populations; and significantly higher health, life spans, and standards of living in most countries in the world. We have been in the industrial phase of human civilization ever since.
Is our digital technology revolution now leading the transition to a new kind of information society and knowledge-based economy? In my opinion, all the indicators point in that direction.
For example, according to 2009 statistics about the composition of the US labor force from the CIA World Factbook, over 60% of workers are involved in information-based service jobs - including managerial, professional, technical, sales and office. Only 0.7% are involved in agriculture oriented jobs, such as farming, forestry and fishing; a little over 20% work in the industrial sector, including manufacturing, extraction, transportation and crafts; and around 18% are employed in service jobs which do not primarily deal with information.
Information-based service jobs are the largest portion of the labor force in other advanced economy countries as well, although the figures are generally somewhat lower than in the US. As emerging economies go through the industrialization phase that the advanced economies went through over the last century, we will see the portion of their labor force in agriculture and manufacturing continue to decrease, and their information-based jobs will go up.
The transition to an information-based, knowledge economy, is raising the requirements for literacy and education to whole new levels. When we were primarily an agrarian society, the number of people who knew how to read and write was relatively small. This all started to change in the 19th century as the new industrial and administrative jobs required a more literate, better educated work force. Public schools were developed in the US, the UK and other countries, as were free, open public libraries. Literacy rates kept increasing throughout the 20th century in the US and many other countries around the world.
Industrial age literacy is no longer enough. Learning is no longer something that takes place primarily through formal education in school when young. Lifelong learning is now required for an increasing number of jobs, as well as in our personal lives, in order to keep up with advances in technology, tools, and the new skills needed to effectively use them.
In the past, our stocks of knowledge, - what we knew, - was a great source of economic value. That is no longer the case, because the increasing rate of change all around us is rapidly obsolescing knowledge. Therefore, the real economic value has now moved from the stocks of knowledge to the flows of new knowledge that we are now able to acquire throughout our lives, and thus refresh and expand our skills. Lifelong learning may well be one of the defining characteristics of our emerging knowledge-based economy.
Another indicator that we are likely transitioning to a new kind of society are the kind of problems we are now able to analyze and solve. Over the past two centuries, we made huge progress in applying science, technology and innovation to develop increasingly complex physical things, including railroads, cars, airplanes, chemical plants, refineries, power stations, bridges, skyscrapers, computers, microprocessors, and so on. But, the huge advances in digital technology, are now enabling us to also apply science, technology and innovation to services of all sorts, from finance, to health care to entertainment.
We are also learning how to apply science, technology and innovation to highly complex organizational systems, including the structure and management of companies, government agencies and cities. To help us in these monumental tasks, we are making just about everything around us smarter through the use of information-based intelligence. We keep developing increasingly powerful and sophisticated tools, such as Watson, in order to leverage the huge amounts of information all around us to help us solve these highly complex problems and make better decisions.
The final indicator I'd like to mention that a historical transition is underway are the changs taking place in the very nature of organizations, both private and public. Over most of human history, the bulk of new ideas and innovations were developed by smart individuals and relatively small organizations. Larger institutions, - armies arguably being the exception, - were hard to organize and manage because of the lack of effective means of communications.
The industrial age, especially the 20th century, saw the rise of much larger, vertically integrated organizations. Governments got larger to try to administer and provide services to their growing populations and economies. Countries embraced a variety of economic systems in the spectrum between socialism and central planning on the one hand, and capitalism and market-based principles on the other. The rapid industrialization of the economy gave rise to many new vertically integrated, hierarchically organized enterprises in order to master the new means of production and distribution.
But, as our societies and economies have grown in complexity, and as our communications technologies and tools keep advancing at a prodigious rate, we are once more becoming a more entrepreneurial society. With few exceptions, most governments around the world have been embracing market-based principles because socialist style central planning just does not seem to work beyond a certain scale. It moves way too slowly and leads to bad decisions.
Large companies are still needed to handle complex projects, especially those requiring sophisticated R&D and global integration. But, it is difficult for many large firms to combine global scale with the flexibility and agility needed to keep up with technology and market changes and effectively compete against faster moving, smaller companies.
As in the past, the bulk of the innovation and job creation will come from groups of individuals and small businesses that are able to move much faster, especially now that powerful but relatively inexpensive information and communications technologies give them access to the kinds of tools, skills, administrative capabilities and global reach that were previously only available to larger companies.
It is quite possible that our information age is not just another 50 year Kondratiev Wave that will play out like the previous four. Perhaps something bigger is going on: a transition to an information society which will be as profound as the transition that took place over the past two centuries from an agrarian to an industrial society. What are the implications? Will the economic cycles become longer than 50 years, since so much is changing; or shorter, since everything is moving so much faster? Will new jobs emerge that we can barely conceive of today? Will our standard of living continue to rise in the US and other advanced economies, or will it do so only in emerging economies? What should governments do?
Lots of deep questions to think about.