To devise her model, Carlota identified several consecutive great surges of development in modern economic history, from the spread of mechanization at the end of the eighteenth century to the rise of the automobile industry at the beginning of the twentieth century. In between those two periods, the world economy also went through the age of steam and iron railways and the subsequent age of steel and heavy engineering (civil, naval, electrical, chemical).
Carlota describes each of these revolutions as “a powerful and highly visible cluster of new and dynamic technologies, products and industries… a strongly interrelated constellation of technical innovations, generally including an important all-pervasive low-cost input, often a source of energy, sometimes a crucial material, plus significant new products and processes and a new infrastructure.”[40] Each has spawned its own “techno-economic paradigm”, which is a set of best practice principles for innovation—the new common sense that organizations need to embrace if they want to remain competitive in the economy of the day.
The first great surge of development began in 1771, when English merchant Richard Arkwright built his legendary Cromford mill. By combining labor, capital in the form of machines, and energy generated by a paddle wheel (later a steam engine), Arkwright’s mill inspired a widespread effort to mechanize the production of textiles. This period marked the beginning of unprecedented productivity gains and a radical transformation of the Western economy. Cotton-spinning mills were built everywhere. Canals were dug to transport goods and commodities in large quantities[41]. Productivity gained steam at the macroeconomic level and propelled economic growth to unprecedented heights[42]. The period of dramatic prosperity that followed the rise of the textile industry proved a radical break in economic history. This is why we remember it as the Industrial Revolution.
The next great surge began in 1829 with the triumph of Robert Stephenson’s Rocket steam locomotive in the competition to propel the newly formed Liverpool-Manchester Railway. Thanks to the speculative Railway Mania that ensued in the UK, the development of railways brought about radical changes in the economy, with the shortening of distances and the possibility of transporting goods, people, and information in a much shorter time frame. Sources of energy started to diversify, with steam coming after coal. Increasing mastery of iron metallurgy allowed progress in industrial production and opened up yet another period of Britain-centered prosperity, the Victorian era. This was a time when the UK was at the height of its industrial and military power. In turn, the US, Germany and France deployed their own rail infrastructures and gradually caught up in terms of economic development[43].
The third great surge was born with the development of a new, pervasive, low-cost input: steel. From the middle of the 1870s onward, technical progress in the manufacturing of alloys made it possible to mass produce steel at ever-lower prices. The abundance of cheap steel allowed the development of heavy engineering: the construction of the first large factories, the deployment of the transcontinental railway lines, the construction of steamboats, and the installation of submarine cables that enabled instantaneous telegraphic communication from one continent to another. Thanks to cheap steel and a whole set of new institutions, the economy entered a phase of globalization. Capital was also deployed to produce, transport and distribute electricity, a new form of energy that would later lift production and consumption up to an even larger scale.
The fourth great surge of development was marked by the eruption of cheap oil into the economy. First used for lighting, oil would gradually reveal its ability to propel engines[44]. Meanwhile, the “American system of manufacturing”, which promoted interchangeable parts, had led to the development of the typewriter, sewing machine, and bicycle. As they began generating demand for precision machine tools, the industries that grew up around these products became forerunners of a new approach to industrial production, paving the way for the emerging automobile industry. Henry Ford launched production of the Model T in 1908 and applied the principles of both the “American system” and scientific management to assembly lines producing cars for mass consumption. One after another, all industries embraced the new techno-economic paradigm discovered by the pioneering car industry. The mass production of goods and services began to serve ever larger consumer markets. After World War II, the deployment phase of the age of the automobile and mass production gave rise to one of the longest periods of prosperity in economic history—an episode known as the post-war boom[45].
The origins of the current great surge, the fifth since the end of the eighteenth century, dates back to 1971 when the first microprocessor was developed by Intel, a company founded three years earlier by Robert Noyce and Gordon Moore[46]. Thanks to the integration of all the key components of a computer on a single chip, the microprocessor would give birth to the microcomputer. Driven by this breakthrough technology, computing would find its way out of the world of large corporations, universities and government agencies to finally reach the general public—notably with the burst of personal computing in the 1980s orchestrated by companies such as Apple and Microsoft.
The microprocessor is the breakthrough innovation that, 25 years later when the US government opened the Internet to the private sector[47], brought the frenzy of a major technology bubble. In turn, the bubble would lead to the triumph of ubiquitous computing and its revolutionary impact. The spread and exploitation of new technologies depends on the construction of relevant networked infrastructure. And bubbles are often the only way to weave the network together before the investments pay off. It’s in the nature of infrastructures to be all or nothing, and bubbles allow capital gains to replace potential dividends as the bits are being joined, with profits destined to form only much later in the future.
With this fifth great surge now nearing its deployment phase, we are definitely leaving the age of the automobile and mass production. Much like in the last century, we are witnessing a new techno-economic paradigm expanding into more and more industries, with new entrants harnessing the power of computing and networks to impose a new mode of production and consumption. Today is not about big, pyramidal organizations seeking supply-side economies of scale to mass-produce standardized goods and services for mass consumption. It is about agile, innovative firms obsessed with using technology-driven network effects to produce an exceptional experience at a large scale.
Transitions from one age to another are never easy. Even once the age of the automobile and mass production had entered its long period of senile decay, we had to wait quite some time before a new techno-paradigm emerged—and we were only prompted to better understand it by prescient authors such as Carlota Perez. The hesitations in our vocabulary bear witness to this as we alternatively use the vague terms of a "post-industrial economy", a "post-Fordist economy"[48], a "knowledge economy”[49], the “immaterial economy”[50], “network economy”[51], “digital economy”[52], or simply the “next economy”[53].
The 2008 crisis accelerated the decomposition process of the old age and pushed forward the new techno-economic paradigm, helping us to see it more clearly. We needed new infrastructures to emerge and multiply the performance of transportation and communication systems while reducing their costs to unprecedented lows. The change imposed on the economy as a whole has given birth to new companies. But that change has also exposed individuals to a new form of economic insecurity, which largely explains the ongoing crisis of the Western middle class.
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Different days, similar problems
One symptom of the crisis is the difficulty most of us have in understanding blue-collar jobs and their place in our collective psyche. On the one hand, our social contract has seemingly been designed around the core message that social climbing was about escaping those blue-collar jobs and sparing your children from even considering them. The main reason for doing well in school is that it enables you to head to university and obtain a degree that shields you from manual labor.
On the other ha
nd, there’s a sense of nostalgia for the lost manufacturing jobs that have been wiped out by the winds of globalization, financialization, and automation. Donald Trump’s “Making America Great Again” are mostly code words to signal that the US will be bringing manufacturing jobs back. It’s appealing to large swaths of (white) American voters because of the pride and security that once used to be attached to manufacturing jobs, regardless of their position on the income ladder[54]. It’s all the more appealing because what most people see in the rising age of ubiquitous computing and networks is fewer jobs, diminishing wages, a wider inequality gap, and rising economic insecurity.
We can hardly prove those people wrong. The “Great Decoupling” is how Erik Brynjolfsson and Andrew McAfee describe the widening gap between productivity gains and real household income[55]. Fast-paced technological progress makes it possible for businesses to maximize output per worker. Yet unlike what happened during the post-war boom, higher labor productivity isn’t translating into greater purchasing power for workers. On the contrary, the impression is that the more technology we deploy, the further workers fall down the social ladder. And so while technology could be seen as the solution to our current economic and social problems, in the actual state of things it's seen as only making the situation worse.
Too many people accept the pessimism inspired by an imagined past and a difficult present. For them, inequalities are bound to rise and jobs are bound to disappear. The only way to preserve balance in society would be to slow down technological progress (the solution of the neo-Luddite[56]) or to implement universal basic income (the solution of the politically inexperienced Silicon Valley engineer, which I’ll discuss later in this book).
Another group of people, however, correctly observe that the same decoupling happened one century ago, just when we entered the age of the automobile and mass production. As the labor historian Nelson Lichtenstein has noted[57], in the 1920s “output per worker in [US] manufacturing leaped upward by a remarkable 43 percent, while wages barely held their own.” In other words, what we're currently going through is not unprecedented. Rather it is to a great extent a recurrence of what happened in the 1920s and ‘30s when the Western world transitioned from the nineteenth century age of steel and heavy engineering to the twentieth century age of the automobile and mass production.
With The Great Transformation, published in 1944, the Hungarian-born historian and economist Karl Polanyi offers one of the best accounts of that techno-economic transition[58]. Although it’s not autobiographical, the book is deeply rooted in Polanyi’s life. Like many who grew up in Budapest and Vienna before the Great War, he witnessed first-hand the downfall of a civilization. As a soldier in the Austro-Hungarian army on the Eastern front, he experienced the violence and absurdity of World War I. As a socialist Jew, he fled the persecutions that later contributed to bringing down Europe. And as an intellectual, he felt the urge to write about it. This gave us The Great Transformation, one of the greatest political and economic tales of the troubled twentieth century.
Polanyi’s work is often described as a harsh critique of laissez-faire in the tradition of classical liberalism[59]. But in my eyes it’s also helpful to think about the institutions that are needed to support the market system and make it more sustainable and inclusive. The overarching concept brought forward by Polanyi is that of the “double movement”[60]: driven by technology, the market starts imposing its dynamics onto society; then, reacting to the harshness of the unrestrained market and the suffering it brings about, society reacts and ultimately reshapes the corporate world to channel its power and serve the many instead of the few. The “Great Transformation” is the painful process a society must go through to imagine and set up these indispensable institutions—a process that includes softer methods, like elections and collective bargaining, but also more destructive paths, like revolutions, fascism, and war.
Indeed what Polanyi describes in his book is the long techno-economic transition between two very different worlds. One is the nineteenth century economy, which mostly relied on the gold standard. Its prosperity during the age of steel and heavy engineering remained characterized by extreme economic inequality and limited access to the political process. The other is the twentieth century Fordist economy that gave birth to the age of the automobile and mass production, accompanied by the widespread expansion of voting rights.
Toward the end of the nineteenth century the old economic order began to unravel. At work was the rise of various forms of protectionism, from tariff barriers to colonial empires. When several pillars of that system began to falter, the resulting tensions mounted up toward World War I, which completed the destruction of the nineteenth century world order and proved to be the final crisis of the gold standard. As written by Polanyi, “the breakdown of the international gold standard was the invisible link between the disintegration of the world economy which started at the turn of the century and the transformation of a whole civilization in the thirties”[61].
Another world began to emerge, in which production and consumption proved radically different from what they used to be. Many works of art, among them Upton Sinclair’s The Jungle (1906)[62] and Charlie Chaplin’s Modern Times (1936), dealt with the fear that the new system of production inspired in astounded intellectuals and artists of the time. Today, the Fordist system — mass production of standardized products along giant assembly lines ruled by scientific management—may inspire nostalgia for those lost, secure jobs in manufacturing and giant bureaucracies. But at the time, it was a frightening world of insecurity and alienation. Absent were the institutions that would finally put the Fordist economy on the path to economic security and prosperity. As Joseph Stiglitz wrote in the introduction to a recent edition of Polanyi’s book, “rapid transformation destroys old coping mechanisms, old safety nets, while it creates a new set of demands, before new coping mechanisms are developed”[63].
The fact is that the first half of last century was marked by the long and violent crisis that confronted two powerful movements. On one side were the established tenants of laissez-faire: backward-looking business leaders and elected officials who favored restoring market mechanisms as they had known them. On the other side was the emerging labor movement. Immediately following World War I, which had marked the failure of the ruling elite, empowered union leaders and socialist politicians tried to make the most of the extension of voting rights to advocate for their cause. Harnessing the democratic process, they demanded that the business community and the government finally put in place a safety net that would provide economic security to the rising industrial working class. The thriving big Fordist factories brought about new risks for which new coping mechanisms needed to be deployed.
The impossibility of settling that dispute amicably led to the unraveling of Europe. Again according to Stiglitz, “when neither movement was able to impose its solution to the crisis, tensions increased until fascism gained the strength to seize power and break with both laissez-faire and democracy”[64]. Even though Europe paid the highest price, fascism appeared in different places around the world. This suggests that fascism was not linked to a particular cultural or political context as much as it resulted from the tensions brought about by the transition itself.
Indeed the path from cheap oil and assembly lines to the prosperity of the post-war boom wasn’t easily traveled. The Great Depression signaled the exhaustion of the age of steel and heavy engineering. The growth of the Fordist mode of production imposed suffering on workers and instability on markets driven by the booms and busts of mass consumption. In the aftermath of the trauma that was World War I, the incapacity of legacy institutions to hedge individuals against the critical risks of the day led to unrest in the workplace, political turmoil, the rise of fascism, and the race to yet another world war. It was only after World War II that Western governments were finally able to install a whole set of new institutions for the techno-economic paradigm of the new age.
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How we once built the Great Safety Net 1.0
The central question of this book is this: Where do prosperity and economic security come from? I believe they don’t come from a single magic-bullet mechanism like wage subsidies, a robot tax, tougher antitrust measures, a higher minimum wage, or universal basic income. Rather they can only emerge from a complex macro mechanism that goes way beyond the narrow definition of the safety net (e.g. the welfare state). In the age of the automobile and mass production, what I call the ‘Great Safety Net’ used to rely on three major institutional pillars: social insurance, the financial system, and collective bargaining.
The first pillar was social insurance: programs designed to cover certain critical risks to which individuals are exposed, such as old age, illness, and unemployment. One of the first such programs to have been deployed by government authorities was Germany’s occupational accident insurance in 1884. The goal of then-Reich Chancellor Otto von Bismarck was not to cater to the demands of the labor movement, which he hated. Rather, it was to undercut the nascent trade unions of the time as they were gaining strength in propagating dangerous socialist ideas.
Occupational accident insurance was a breakthrough in that for the first time employers had been given a legal responsibility for the well-being of their employees. After Bismarck’s inroads in the field of social insurance (an achievement later known as “state socialism”), the UK followed suit with the Old-Age Pensions Act of 1908 and the National Insurance Act of 1911. Then in 1935 Franklin D. Roosevelt and Frances Perkins, his Secretary of Labor, oversaw the creation of Social Security in the US. A consensus started to emerge around this unprecedented approach: covering households against critical risks was best implemented at the level of entire industries or nations; as such, it required state intervention.
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