A vision for economics

What could our economy and society be like in thirty to forty, maybe even fifty years? Just doing the same things differently? Or doing really different things? What could those things be? And what could economics tell us about that far-term future? If you ask for such genuine vision, the reaction you’ll most likely receive ranges somewhere between an innocent shrug and a linear extrapolation of the recent past: neither inspired nor very inspiring. With only few exceptions.

Karl Smith offered a glimpse at a longer-term vision in his recent article on Economic Growth in the Age of Diminishing Labor. In his outlook he addresses the effects of ageing and decreasing populations and the role of autonomous systems in sustaining economic growth under such conditions. Okay, that gives us some sense of a direction of travel. But where would that journey take us?

We might take a look at Martin Ford’s The Lights in the Tunnel: he describes how accelerating technological change will force us to change our economic system. Ford observes that since the Industrial Revolution, driven by technological change, our economies have shifted away from labour intensive industries to ever more capital intensive industries; today’s increasing automation of jobs being a logical consequence of this trend. At the same time, our social security systems are still build around deductions from labour wages; they are tied to employment, not to capital. Ford continues that “funding social programs via payroll taxes … puts an unfair burden on labor intensive industries while allowing capital intensive industries to free ride“. However, our thinking about the economy did not keep pace with the technological opportunities:

Economy-wide automation of jobs is not a technological impossibility;
it is a psychological impossibility.

That poses the all important question: What could be an alternative way of thinking about the economy? One that overcomes the psychological barriers?

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So far, Brian Arthur’s The Second Economy is the most clearly expressed vision I have found, published in McKinsey Quarterly three years ago. Already in his opening statement, Arthur points out that “Digitisation is creating a second economy that’s vast, automatic, and invisible – thereby bringing the biggest change since the Industrial Revolution.” Still, he sees a major difference between then and now:

With the Industrial Revolution, the economy developed a muscular system.
Now it is developing a neural system.

These may be bold claims, but Arthur chooses his words carefully. He identifies the early beginnings of digitising the economy way back in the 1990s, especially in business operations for air travel and logistics. Less and less labour is involved in moving ever increasing numbers of passengers or volumes of goods. Where once customers talked to human counter parts, today the customer just launches a fully automated digital process, e.g., by inserting his frequent-flyer card in a machine at an airline terminal: now machines talk to machines talking to yet other machines, and at the end of that invisible conversation the seat on the desired flight is booked and payed, and the customer is ready for boarding.

This invisible, intangible part of the economy is what Arthur calls the second economy. He characterises it as “vast, silent, connected, unseen, and autonomous, … remotely executing and global, always on, … concurrent, … self-configuring, … increasingly it is also self-organising, self-architecting, and self-healing.” Many of these adjectives carry biological and organic connotations; so it is no surprise that Arthur compares the second economy to the root system of aspen trees: under the surface, far-reaching, pervasive, and densely interconnected.

Already now, the connections in this digital network of agents and processes, and their interactions become denser and denser every day. Still, it will take many years for the second economy to unfold its full potential. Based on a back-of-the-napkin estimation, Arthur assumes that in two to three decades, it will surpass the physical economy in size. In parallel, gradually and ever so slowly, the very purpose of the economy is shifting. And that’s the core of Arthur’s vision for the future of the economy:

The main challenge of the economy is shifting
from producing prosperity to distributing prosperity.

With this single sentence, Arthur offers a different perspective of the essence of the economy, what it is meant to be and do. By separating labour (the production of prosperity ) from income (the distribution of income), he opens the gate to an entirely new discussion on how the majority of the population (those who don’t own land or other forms of capital) participate in the economy.

Today’s traditional view of the economy is still built around employment as the centrepiece: you hold a contract with a company, you deliver your skills and labour to the production process, and in return you receive your wage. Employment plays a double role: it generates and distributes prosperity. Without employment, you don’t receive an income, and you don’t participate in the production process either. Worse still, in our social world, unemployment often carries the stigma of being seen as unproductive.

The second economy paves the way to effectively decouple the generation of employment from the generation of prosperity: employment is not necessary any more, when prosperity is generated by machines. The result is not “technological unemployment” in the conventional sense of the term, the result is the end of employment as we know it: the relevance of employment in the generation of prosperity will be lost in the second economy. Our task then is to define and establish new means to distribute prosperity. On that path we have to rethink some of our societal conventions as well, finding answers to questions like:

  • What is “a productive member of society“, when jobs as the synonym for being productive ceased to exist?
  • How will we “contribute to society“?
  • What is an individual’s “value” and self-esteem, when job-related status is no longer available?

At first glance, an economy without jobs will seem entirely unnatural.  To add a little perspective, we might refer to Adam Davidson’s recent article Welcome to the Failure Age, in which the author presents the corporation’s success over the last century in mitigating the risk of innovation failure. As he points out: “The corporation managed the risk so well that it created an innovation known as the steady job.” Turn this argument around to see that the steady job is only a very recent addition to our way of life; it’s far from a natural law.

Still, we must realise that our way forward is far from pre-determined. While we can see clear signs of demographic change and technological advances that define some of the boundary conditions and opportunities, the exact outcome of these trends is yet to be developed. And we will play an active part in that development.

As Brian Arthur pointed out in his seminal work on The Nature of Technology, the relation between society and technology domains such as information technology is complex. In essence, society and technology domains co-evolve in a process of mutual adaptation: society adjusts to the opportunities offered by a technology domain, as much as a technology domain will respond to the needs and demands of society. It would be too simple to assume that society has full control over the path of technology development, but it’s equally wrong to fear that technology single-handedly drives the evolution of society: in reality, the outcome is a give-and-take.

Take the Industrial Revolution as a case in point: from today’s venture point, the initial conditions are best described as predator capitalism, with little to no protection offered to those who fell behind. But gradually, over the course of several decades, society responded to the challenge and established innovative institutions that helped the workers to organise, and to voice and protect their interests (trade unions), or that provided support in times of dire need (insurances, e.g., health or unemployment). And these novel institutions encouraged innovations in organising and managing labour, which in turn influenced the further trajectory of entire industries.

Beyond any reasonable doubt, the economy of the future will require equally significant institutional changes that we don’t yet know in full detail. We are living in truly interesting times, as demographic change and technological advances steer us away from the comfortable certainty of the past. Once again, the future will be what we are going to make it.

 

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