Our economy is the strongest it’s ever been, and is about to get better. At the same time, our economy is broken, and it’s about to get worse.

How can this paradoxical reality be true? Simple, we no longer have one economy. We have two. And all indications point to the fact that these two economies are pulling away from each other, leading to tension, fear, and eventual revolt.  But, at the same time, our lives have been greatly improved by these technological advances. Even the poorest among us in the United States is far richer, healthier, and better off than the richest people living 200 years ago. This is the paradox technology provides.

Creative Destruction

Creative Destruction is a term economists use to describe the process by which new innovations render old processes unnecessary. For example, the invention of the automobile put the horse and carriage out of business. As did the iPod to the Discman, and the Blu-ray did the VCR. When a new invention replaces an old, its creation often destroys the former product as it captures its market. This results in what we call “structural unemployment,” as the people working in the old industry lose their jobs.

Historically when this occurred, the job losers would retrain themselves and sell their labor in another way, often to the new industry. In almost every economics 101 course in the world, this is the position still cited. A disruption in labor that results in unemployment will self-correct as the idle labor finds ways back into the market. While fundamentally true, especially in history, this view misses an important consideration. It misses the impacts on individuals by looking at the economy as a single organism rather than a collection of people. That is a problem for public policy to address and it hasn’t been doing a great job lately.

The First Machine Age

In all of human history before the mid-1700’s, the majority of the human population was using its labor to secure food. Fighting off starvation was the single largest problem facing every individual and group of people. Almost all of our time was dedicated to hunting, fishing, foraging, or farming. Time not spent procuring food was used to create household items, like clothes, dishes, hats, and shoes, for use within the family/tribe. Economic activity was limited to the trading of these household goods and food products to one another. Everything changed for the generation born around 1750. Within their lifetimes, they would witness a movement from farms to factories. Their lives would be drastically different from their parents’.

The Double-Edge Sword of Technology

In the late 1700’s several new inventions entered the mainstream. Improvements in agriculture freed individuals from difficult manual labor in the fields. At the same time, machine power improved the ability of individuals to produce the household goods they needed. These large machines were far too large and expensive for individual households to afford or accommodate. So, individuals with the means to purchase and house these machines centralized the production in manual labor factories.

The Good

The products themselves became standardized in quality and ubiquitous in society. High productivity translated to lower costs, making goods previously difficult to acquire within reach of nearly everyone.

Only a handful of individuals were required to produce the same number of goods. Theoretically, this should have allowed the population to free itself from work, enjoying the same standard of living with less effort. But, in reality, that is not what occurred.

The Bad

Instead, there was a period of disruption which lasted generations. With few people in control of all production, wealth was concentrated and the working class was pushed to the point they barely survived.

The result was devastating to the economy. If we used the metrics we use today, you would see a huge bump in unemployment and a drastic reduction in personal wages.

The Ugly

This led to serious political concerns and to literal revolts against the government. The Luddite movement in Britain, the American Revolution, and the breakdown of the colonialism framework that supported European empires. Colonies around the world threw off their allegiances to foreign powers and embraced the ability to provide for themselves.

Transition

Individuals had difficulty transitioning to the new economy. They lost work and purpose. In order to restore balance, provide for their families, and engage in the new economy, they uprooted themselves and moved to the urban centers that housed the manufacturing.

It was challenging for the generation raised in one economy to make the leap. But once the next generation entered the workforce, having not known any other way, the machine age was fully embraced.

Net Impact

The result was a staggering increase in output, and eventually in quality of life. The new generation adapted to the new times and took full advantage of the benefits the industrial revolution provided.

Yet, there were negative aspects that flowed from the first machine age, ranging from child labor to environmental degradation. During the transition period, people worked far too many hours in far too unsafe work environments.

Eventually society adapted and embraced the new age and corrected the problems that emerged from it.  Now we, the future generations, live much better lives, have much shorter work days, perform much less difficult work, and enjoy a host of luxuries beyond the imagination of our ancestors. Imagine our lives today if those technological advances had been quelled.

The Second Machine Age

We are currently living through the second machine age. Just as the Industrial Revolution transitioned our economy from one centered on agriculture, the Technological Revolution will transition us past the manufacturing based economy.

This is not a new idea, but it is one that is becoming increasingly of interest. We all, especially our political leaders, need to pay much more attention to what is going on. There are millions of Americans out there today that have become displaced and marginalized by the Technological Revolution. They need our help. And trying to stop the momentum of change is an empty promise that leads to revolution rather than resolution.

The Dawn of the Technological Revolution

The second machine age can be said to have began in the late 1960’s, when IBM’s model 75 was purchased by NASA to replace human computers with digital ones. This process of improving the product, but displacing the people should sound familiar.

While those human computers lost their value, an entire new industry emerged, complete with jobs for those people engaged in it. Soon, the digital computer grew into the personal computer, improving the productivity of office workers, thus reducing the need for each one. By the 1990’s, the computers started to become linked to one another, dramatically improving communication flow and information access, but reducing the need for currier services and other support staff.

Replication

But most importantly, the digitization of information made it replicable, reducing the number of times work had to be performed. This replication turns out to be the key to the economic disruptions we are now facing. Previously, if you wanted to hire a person to complete a task, you would seek out the most capable person to do so. If that person was employed elsewhere, you would have to take the next best person on the list. We call these “rival goods” in which the use of a good, in this case labor, prevents it use elsewhere. In this model, the second best option has value and would also be deployed in the economy.

Programs however are “non-rival.” That is to say, the same program can be used by multiple people at the same time due to the ability to replicate it. And the cost of that replication is nearly zero.

This implies two truths. First, the programmer can now bid to complete both tasks rather than one, collecting both payments. And second, the near zero marginal cost implies that the programmer can always undercut the human competition.

Where We Are Now

The first machine age replaced physical work with machine power. With the aid of the machines, one person could do the work of 50. This implies that if we fully employ the same number of people, we would generate 50 times the output. But there really wasn’t a reason to produce 50 times as much food. Perhaps there wasn’t even enough land to do that at the time. So, those people dedicated their labor to producing other things. The result was a lot more goods in our lives than before, arguably improving the quality of our lives.

The Second Machine Age is replacing intellectual work, so long as it is routine in nature. In doing so, the computers can perform the human work without the human. And while robots themselves require production at a cost, programs are digitally replicated at no cost at all.

This implies that human labor is decreasing in value, hence the static median income over the past 40 years. We are creating more goods (GDP is rising), but we are doing it with less labor (wages are not), and the few people with the winning product are capturing all the gains (income inequality is rising).

Not Just a Repeat

That’s why things are different this time. We can’t just ramp up production of goods in order to employ the labor force anymore. For one, there aren’t enough resources and the environment isn’t able to absorb more waste. But second, the displaced workers can’t simply be retrained from threshing crops to running machines this time. If they are to make the leap from manual production to intellectual decision processing, it requires a tremendous jump.

For now, the transition generation is required to program and develop ways to automate the work that their parents and grandparents performed. But as that is currently being conducted, people are being displaced. Eventually, almost all physical work will not require human labor and all the programs will be written. The question is, what do the humans do when there is no required work? More importantly, how will an economy function if the demand side of the equation has no money to spend? I think things will turn out fine, but the transition is going to be hard.

The Future

A child born today might not ever drive a car or work an 8 hour day. I think we are in the midst of a major change as a species. We need to start thinking about what that will mean. We also need to take a serious look at how to manage the transition. If we don’t, we are going to see difficult times ahead. People will become increasingly impoverished and desperate. Desperation leads to destruction. We have already seen this desperation impact the political front. It’s not going to get better on its own.

Now its time for us to address the problem head-on, rather than simply use the plight of the displaced for political gain. This isn’t an issue of immigration or outsourcing. It’s not a matter of “get a job” or “go back to school.”  The jobs people have historically done no longer exist. Getting a degree doesn’t change that.

And stopping the technological progress is not the answer. Neither is fortifying our borders, ripping up trade agreements, or stopping highly skilled foreigners from contributing to our growth. We need to stop blaming others and start fixing ourselves.

The last time we went through this process, it took the Great Depression and a world war before our society was ready to accept the leadership to change. Out of those ashes grew the strongest economy the world had ever known. Let’s hope it doesn’t get that far this time around.

 

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