A Historical Perspective on the Digital Economy

A few months ago, the magazine strategy+business (s+b) published a roundtable discussion between s+b editor-in-chief Art Kleiner, economic historian Carlota Perez, and PwC UK partner Leo Johnson.  The discussion was centered on Perez’s theory of technology revolutions and economic cycles.  In her 2002 influential book, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages and in several other publications, Perez framed the digital economy of the past few decades from a historical perspective.  If we examine the long term historical big picture, patterns emerge which can help guide our understanding and planning for the future. 

According to Perez, since the onset of the Industrial Revolution we’ve had 5 major technology-driven economic cycles, each one lasting roughly 50-60 years.  First was the age of machines, factories and canals starting in 1771.  This was followed by the age of steam, railways, iron and coal, starting in 1829; steel, electricity and heavy engineering in 1875; oil, automobiles, and mass production in 1908; and our present ICT-based digital age starting in 1971.

Each economic cycle is composed of two very different periods, each lasting roughly 20 - 30 years.  The installation period is the time of creative destruction, when new technologies emerge from the labs into the marketplace, entrepreneurs start many new businesses based on the new technologies, VCs encourage business model experimentation, and the new ventures attract considerable investments and financial speculation.  Inevitably this all leads to a financial bubble, which eventually bursts in spectacular fashion leading to a time of crisis.

After the crash, comes the deployment period, which Perez views as a time of economic transformation and institutional recomposition.  The now well accepted technologies and business paradigms become the norm; infrastructures and industries start getting better defined and more stable; and production capital drives long-term growth and expansion by spreading and multiplying the successful business models.

Kleiner started the roundtable by asking Perez to comment on the differences between our present cycle and the four previous ones.  We are now over 45 years into the digital revolution, and over 15 years since the crash of the dot-com bubble, - the longest such periods according to her theory.

“It’s probably also the deepest transformation of everyday life, and the one that has gone the furthest globally,” noted Perez.  “Also, given our longer life span, the older generation has taken longer to hand over power - in this case, to younger digital natives.  Even after 40 years, the information and communications technology (ICT) revolution is far from complete.  It hasn’t fully changed our way of life, as previous technological revolutions had done.”

In addition, she later added, this time around we’ve had two major bubbles to recover from, - the dot-com one in the late 1990s and the real estate bubble of the mid-2000s which led to the 2008 global financial crisis.

We’ve still not finished recovering from the crash of these two recent bubbles.  To understand what it will take to turn things around this time, Perez compared our present cycle to the previous age of oil, the automobile and mass production which prevailed through much of the 20th century.  In a 2016 article, Capitalism, Technology and a Green Global Golden Age: The Role of History in Helping to Shape the Future, she argued that we’re going through a crucial historical moment similar to the 1930s, which requires the kind of creative thinking and bold measures for which we justifiably celebrate statesmen like Franklin Delano Roosevelt and John Maynard Keynes.

The Roaring Twenties was a decade of industrial growth and rising consumer demands, as well as artistic and cultural dynamism.  Economic prosperity brought with it financial speculation, widening wealth disparities and a stock market bubble which came tumbling down with the Wall Street Crash of 1929, ushering  the Great Depression of the 1930s.  The devastating impact of the Great Depression led to extreme right- and left-wing movements and the rise of populist, xenophobic, anti-immigrant groups around the world.  But technological innovations continued unabated, including mass market advances in consumer appliances, automobiles, communications and entertainment.  The demands of Wold War II further accelerated technological innovations.

After WW2 came what Perez calls a golden age of broad economic growth and prosperity.  Partly to undercut the threats of communist expansion and anti-capitalist propaganda, national governments brokered cross-class settlements between management and labor.  This made it possible for growing numbers of their populations, - including blue-collar workers, - to achieve a middle class life-style and aspire to what we think of as The American Way of Life.

“During the golden age of mass production, in the 1950s and early 1960s, the interests of business and society converged,” said Perez.  “With the welfare state and suburbanization, working-class people in many Western countries could become homeowners and consumers.  Therefore, when companies paid high salaries and high taxes, it all contributed to increasing domestic demand.  Government support for education and health services freed up discretionary cash for people to spend on consumer products.  High demand for these products created conditions for growth and profit.  It was a robust positive-sum game, a super win-win between business and the majority of the population, resulting in good profits and decent livelihoods.”

But, this golden age didn’t last.  In the 1970s and 1980s two major factors started putting considerable pressure on jobs and wages.  Technology-based automation and sophisticated supply chains led to major innovations and efficiencies, while globalization and deregulation led companies to move jobs from advanced to emerging economies, given their lower labor costs and rising local demand.  She observed that the wealth distribution today is about the same as it was in the Gatsbyesque Roaring Twenties, - the top 1 percent receive 25 percent of society’s total income.  By the 1950s, the total income of the 1 percent was down to 10 percent.  “Every installation period brings inequality until the state comes back actively to reverse it and relieve social unrest.”

What has to happen to reverse direction and get back to a new golden age?  A stable, harmonious capitalist economy requires wealth creation and a more equitable wealth distribution, said Perez.  The two must be combined.  “The last time a period of crisis ended, after World War II, there was a concerted effort by many government and business leaders to create a unified, prosperous, long-lasting recovery…  Unfortunately, today’s leaders haven’t yet taken on the role they played at this point in past surges.  Their stepping up last time was a catalyst for ending the crisis.  To get there, perhaps we need to have a crisis that is truly felt as a crisis.  That seems to be the self-correction mechanism of capitalism; things need to get so bad that stability gets threatened seriously.”

Our present crisis threatens to upend the stability of the US and other societies.  It’s been accompanied by “a dangerous political shift, the separation of the interests of major global corporations from interests of the national societies where they are based.”  A lot of people are angry.  “They are ready to follow demagogues.  Leaders around the world should know that they ignore popular unrest at their peril…”

“Even now, the decision makers are still waiting.  They don’t understand that, as in every previous technological revolution, the public sector has to lead the way back after the major bubble collapses.  Only with intelligent government policies providing clear directions for profitability will markets work again.  And only with effective policies to restore jobs and incomes will social unrest wane.”

Despite the current state of politics around the world, Perez remains optimistic.  In her 2016 article, she discussed the huge potential for technological innovation if the world’s key decision makers can come together and act in concert as they did at the end of WWII.  If so, she envisions a sustainable global golden age based on three inter-related policies:

  • Cheap Universal ICT: “Full internet access at low cost is equivalent to electrification and suburbanization in terms of facilitating demand (and also increasing user and worker skills).”
  • Sustainable growth: “Promoting the revamping of transport, energy, products and production systems to make them sustainable is equivalent to the Cold War, the Space Race and the spread of suburban homes in terms of directionality for innovation.”
  • Full Global Development: “Incorporating successive new millions across the world into sustainable production and consumption patterns is equivalent to the Welfare State, Post-War reconstruction and government procurement in terms of demand creation.”

“How does all this change begin?,” asked Kleiner in conclusion.  “We need to look at history, replied Perez.  “Leaders would have to understand their role in this crucial moment, move to open a consensus-building process, and be determined to take bold measures.  Their efforts, hopefully supported by business and society, could be the basis for the global golden age of the information economy.”

External URL: http://blog.irvingwb.com/blog/2017/12/a-historical-perspective-on-the-information-economy.html

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