Tuesday, 29 November 2016

Is technological progress at the heart of stagnation?

In the previous text I presented several economic hypotheses explaining why the developed world has entered what could possibly be a prolonged period of economic stagnation. In today's text (note: long read) I will present my own opinion, arguing that what we are experiencing is a temporary slowdown which could last for several decades, but one that could also provide the greatest opportunity for the next huge boost in living standards. I hypothesize that the underlying factor behind both the current temporary stagnation (particularly in productivity and real wages) and the upcoming rise in living standards is - technology

As I've emphasized several times on the blog before, I believe we are currently, for the past 30 years, in the period of the Third Industrial Revolution. And in our times, it's only heating up, with the potential to bring to some new disruptive innovations that could change our world as much as the previous two industrial revolutions had. The technological progress we are currently undergoing will, without doubt, be disruptive. As it always is. But in its disruptive nature it will bring greater benefits for the future generations. Automated work being replaced by robots will surely lead to job losses. But in a new economy, the job losses could be offset by a series of new opportunities and entirely new careers. Which ones in particular, we can't really tell at this moment. But just like the first two industrial revolutions brought completely new jobs and changed the world as we know it (more than 95% of jobs that exist today didn't exist before the 18th century), so will the Third bring in new jobs and new possibilities we can't even imagine. Social networks have already introduced new types of occupations (social network experts being the most dubious one). Various bloggers and youtubers have managed to turn their hobby into a money making venture. Firms are just beginning to exploit the Internet, and its users are just uncovering the various ways they can make money on it. None of this was even conceivable back in the 1990s when our remote Internet usage was often wrapped around in frustration with our dial-up connection (remind yourself of that glorious sound, I know you want to!). Today so much more opportunities await. 

The good thing about this inevitable change is that it tends to be gradual. This meaning that even if robots and automated work start replacing low-skilled jobs, this will all still happen during a prolonged period where it will be possible to maintain a generational switch.

What does this mean in particular? Let's take the example of the taxi market and the driverless car (or if you want - Uber, which is the intermediate step). Naturally if driverless cars all start hitting the streets they will almost immediately take away all the jobs from the taxi drivers. Which is likely to cause them to rebel, quite legitimately so. One always has an incentive to protect their job and their immediate interest. A good way to achieve a peaceful transition would be to allow the technological breakthrough to enter gradually by having the taxi drivers operating and overseeing the driverless cars at first. This would, on one hand, correspond to a permanent barrier to entry for any new driver, however all the current drivers would keep their jobs. Until retirement or until they find another job, whichever comes first. Each current driver would therefore still be driving/riding the driverless car and providing for example local advice to tourists. This would then be a perfect way to tell whether or not the passengers really enjoy the conversation and demand for the actual person to be in the car, or do they just prefer the robot to take them where they need to go without speaking to it. It's all about having choices! And in this way to minimize the despair of potential job losses imposed by the new technology. But I digress. 

The current slowdown is essentially of temporary effect as we're currently in a transitional period from the old industry-driven economy (including the service industry) to the new digitally-driven economy. The industry-driven economy still rests upon the old industrial classification paradigm: the primary sector (agriculture, fishing, and mining), the secondary sector (manufacturing, production), and the tertiary sector (services). So far in the history of the West we have witnessed the transition from an agricultural-dominant economy to a manufacturing-driven economy (the First Industrial Revolution in the 18th century), a shift from manufacturing to rapid industrialization in the 19th and beginning of the 20th century (the Second Industrial Revolution driven by mass innovation), and a shift from industrialization to services in the final part of the 20th century following a period of rapid globalization.

Now we are facing something different - a shift beyond the standard paradigm. Disruptive technological progress will rapidly change our patterns of production and of specialization. It will be nothing like the world we knew so far. Just like the first two industrial revolutions brought us to a state of the economy not known to us before. In the 16th and 17th century having a locomotion and machines was unimaginable. In the 18th century having electricity, cars, airplanes, and modern medicine was unimaginable. After WWI having computers and traveling to space was unimaginable. 40 years ago a cell phone was unimaginable, while a mere 15 years ago a smartphone was unimaginable. True, there were always visionaries who offered their overly enthusiastic views of the future by simply extrapolating the current levels of technological progress. In the 1960s visions of the future included flying cars, intergalactic travel, jet-packs, and personal robots, all by the year of 2000 (check out some of the futurist visions from that time - some of them actually did come to existence; also read this piece to see which predictions came true).

How the Internet has changed things - for the better

Why don't many people see this obvious advantage of the technological progress so far? A famous quotation from Nobel prize winner Robert Sollow: "You can see the computer age everywhere except in the productivity statistics" is actually true. There is a productivity paradox where the advances in computing power haven't really made workers more productive. This is contrary to the idea that automation of work should increase total factor productivity. Essentially the idea is that despite all the benefits the Internet has brought to us (instant global communication, entirely new business and marketing models, different consumer behavior patterns, social networking, even spontaneous mass gatherings), it has made only marginal improvements in well-being, at least compared to the non-internet age of the 1980s. The technology skeptics cite similar examples where modern technologies only offered marginal improvements over the products we enjoy today. For example, whereas the first invention of the car was a huge advantage over a horse, its further improvements, after reaching a certain level of speed and safety, were marginal. Airplanes are a similar example. Yes, today they tend to be much safer, but flight times are still similar to what they were 50 years ago. The smartphone was an improvement over the regular cell phone, but not as much as the cell phone was an improvement over the landline, and both not as much as the regular landline was an improvement over letters and telegrams.

However all these examples are missing the point. We are still at the very early stages of the Third Industrial Revolution - the Digital Revolution. We are slowly entering the Information age. The Internet has made much bigger changes than standard economic indicators would suggest. Particularly since most of them were indirect. The Internet has, without doubt, changed the patterns of firm specialization and has increased the rate of trial and error as well as innovation. The vast availability of information online can improve business strategies and force businesses to adapt to the Internet revolution. Those that don't, lose customers. No matter what industry they are in. In the upcoming decades this will become even more obvious. Furthermore, the Internet has had a key role in promoting economic opportunity for all, particularly for the underprivileged. To start a business all you need is a laptop and an internet connection (of course, this varies from country to country depending on the scope of regulations). Most importantly the Internet and the increasing socialization it has brought with it can be used to foster democracy and the empowerment of the middle classes. That is one of its, by far, biggest advantages. Social networks and the Internet can do more in overthrowing dictators and holding politicians accountable in democracies than the media ever could. (Obviously they can also be used in an opposite capacity - by distributing fake news and encouraging bubble behavior; but to be fair, fake news and living in bubbles happened way before the Internet). 

For all these reasons, in the upcoming Information Age, the Internet should be free for all - a global public good. Free access to the Internet should be a human right (the UN has done a lot in promoting this idea, there is even an initiative to implement the Internet as a basic human right, but some disagreements still remain). Nevertheless, its creation of economic opportunity, its role in fostering democracy by empowering the middle classes, its ease of access to education (online courses can do wonders!) are more than enough to declare it a human right and offer it as a global public good. This is something that the future might hold for us - free Internet, worldwide. (Although, don't be so sure on the "free" part. We have access to electricity and clean water, but both still come at a cost).

Learning from Japan

Even with all those advantages at hand, we have currently reached a ceiling with our pre-IT revolution models of economic growth. Japan is perhaps the best example. A huge booming economy for 30 years following the recovery after WWII, it was hit by a housing bubble burst in 1990 and has experienced very low to zero economic growth ever since. In the past 26 years Japan grew, on average, by 0.7%. Its lost decade of the 90s has turned into two lost decades and is now in the middle of a third. Its public debt is the largest in the world, and by a long shot (public debt to GDP is 230%, higher than even Greece, with debt to GDP at 170%). For the entire 26-year period inflation has been close to 0, borderline deflation, as have their interest rates. Needless to say Japan has done a series of monetary and fiscal stimuli to prompt up their economy throughout this period, but nothing has worked. The consequences of both are highly visible in their over-expanded monetary base and huge debt.

But in reality, there is nothing wrong with Japan. Yes its economic indicators are terrible, yes the population is ageing which is always a problem in countries with high debt levels, but Japan remains one of the richest countries in the world. Their GDP per capita (PPP) is around $38,000 which is quite a lot for a country with 127 million people. The only comparable in population size is the US with a GDP per capita (PPP) of $55,000. But beyond GDP, Japan ranks highest in many of the measures of living standards and well-being. By life expectancy they are no.1 in the world (84 years on average!), their human development index, prosperity index, happiness index all put them among the top performers. Their health care and education system are flourishing, they have low crime rates, and decreasing inequality. One conventional economic indicator - unemployment - always managed to stay low, at around 4%. And their levels of innovation and technological adaptation are arguably among the world's highest if not the highest. The vast majority of the population is therefore enjoying really good living standards. It seems that low GDP growth, ongoing deflation, and high public debt (as long as it is held by the domestic population in a country stable and rich enough to have a huge demand for its debt, particularly domestic in this case), don't really hamper living standards. The two and a half decades of stagnation have not apparently taken their toll on well-being.

So what's the story here? Japan has simply reached a level of very high living standards combined with a strive for technological innovation that has perhaps even worsened some productivity numbers and possibly GDP growth as well (although there are a number of reasons why GDP growth was low in Japan). The IT revolution took huge proportions in Japan. Anyone who's ever been there speaks of its technological superiority and a number of "cool gadgets". Few of these gadgets have raised GDP, but they have contributed to the well-being of the population, and more importantly, they have opened vast new opportunities for its population. It takes time for these to be seized in order to produce a high magnitude well-being effect.

The Third Industrial Revolution IS at the heart of the current stagnation...

The point is that we are currently experiencing a stagnation caused by a series of factors, one of which is certainly the technological revolution. I've written on that before on multiple occasions. Essentially, technological progress began by shifting jobs and changing the patterns of specialization and production. This will go on for several more decades. But the further it unfolds, the more benefits it will bring that will be immediately noticeable to us. In other words, think of the current stagnation in wages and productivity (and hence economic growth) as an indirect consequence of the upcoming and ongoing technological progress. It takes time for the people to recognize the new patterns of specialization and to exploit the opportunities for new jobs. With the start of the IT revolution in the 80s we've already noticed a series of new jobs being created. It all started with companies like IBM, Dell, HP, and Apple to provide the hardware. Then came Microsoft and revolutionized the software (Apple made it even cooler later on in the second coming of Steve Jobs). Then the Internet giants started emerging: Google, Facebook, Amazon, YouTube, eBay and many others. (The criticism these companies get is that while they replaced many old jobs in manufacturing, it wasn't actually a one-for-one replacement. They created much less jobs than what manufacturing companies created.)

All these new companies emerged in the very beginning of the IT revolution (some even before like IBM). Expect many more of these to come in the following decades. Don't necessarily expect new search engines, software manufactures, online retailers, or social networks. No, the new high tech companies will be about something completely different. They will most likely strive on the benefits provided by all these companies before them (we all have laptops, running on either Windows or Mac, and we all use Google, Facebook, YouTube, etc.).

...but it will also set the stage for the next big boost in living standards

The current level of technological development set the stage for the Next Big Thing. They didn't replace all the lost jobs, and were on that front mostly disruptive innovations. For now. However the foundations have been laid. These foundations are supported by the current (temporary) industry giants. And most importantly they provide the nurturing environment for growth, for new companies that one day will be even greater and will perhaps not only change the jobs market, they could profoundly change our way of life (e.g. robot manufacturing companies, or nanotech companies, or AI producers, or fusion energy companies - a bit too much? Or is it?). In 50 or 100 years from now we may look down on manual labor and automated work as relics of the past. And no one will complain as everyone will find such jobs meaningless and will have the time to pursue their most desired careers. It might sound a bit idealistic from today's point of view but who knows. Cars, trains, and airplanes sounded idealistic back when the First Industrial Revolution was underway, but today we know of no better form of transportation. At this point, we can only imagine.

Now, all this is just a theory. I can devise a multitude of examples and arguments in support of it, but I cannot really test it. Yet. Time will tell basically whether or not this thinking has any merit at all. I do however carry a slightly optimistic bias in believing that we live in awesome times and are on the verge of a breakthrough that most of us simply aren't aware of. My optimistic bias makes me a bit subjective towards the impact of technological progress on future living standards, but drawing simply from historical patterns and the possibilities being uncovered to us, the IT revolution is nothing to be feared.


  1. We must encourage people to have green marketing thesis. It will pursue their most desired careers. It might sound a bit idealistic from today's point of view but who knows.

  2. I don't think the stagnant wages and productivity should be surprising given the empirical evidence shows outsourcing is largely an exercise in labor cost arbitrage and that immigration shifts gains from workers to capital owners. I don't find the lack of wage, productivity gains or rising inequality as surprising.

    1. Research topic: how agro business bribes American politicians in exchange for lax immigration enforcement and consequently wage declines(in some cases nominal wage declines such as the meat packing industry in California), higher profitability and rising inequality.

      It's preposterous to see capitalists ramble about labor shortages given that a shortage exists only at the price they're willing to offer. It's akin to me saying there's a shortage of iPhones because they cost more than £2.