Until the spasm in the markets interfered, this year’s World Economic Forum in Davos, Switzerland, was supposed to be about how humankind would cope in the new age of the smart machine. While share prices were gyrating, the bigger picture was obscured. There is a fourth industrial revolution happening and it is likely to be as profound in its effects as the previous three.
The first Industrial Revolution was about harnessing steam power so that muscle could be replaced by machines. The second was driven by electricity and a cluster of inventions from the late 19th century onward — including internal combustion engines, airplanes and moving pictures. A third revolution began in the 1960s and was based on digital technology, personal computing and the development of the Internet.
Industrial Revolution 4.0 is to be shaped by a fresh wave of innovation in areas such as driverless cars, smart robotics, materials that are lighter and tougher, and a manufacturing process built around 3D printing.
Illustration: Mountain People
A pity, then, that the World Economic Forum was overshadowed by falling share prices and the cost of oil, because the impact of the fourth industrial revolution is likely to be felt long after investors have stopped fretting about a hard landing in China.
Davos was, in some ways, a good forum for the gathering of technology pioneers, business leaders and politicians to consider some of the implications of what is likely to be a different sort of economy.
For example, smart machines are soon to be able to replace all sorts of workers, from accountants to delivery drivers and from estate agents to people handling routine motor insurance claims. On one estimate, 47 percent of US jobs are at risk from automation. This is Joseph Schumpeter’s “gales of creative destruction” with a vengeance.
There are three myths about Industrial Revolution 4.0. The first is that it is unlikely to have as big an impact as the previous periods of change, most especially the breakthroughs associated with the second industrial revolution. In the past, it has always taken time to feel the full effects of technological change and many of today’s advances are in their infancy. It is far too early to say that cars or air travel would prove to be less important than the sequencing of the human genome or synthetic biology.
The second myth is that the process is likely to be trouble-free provided everything is left to the market. It is a fantasy to believe that the wealth created by the fourth Industrial Revolution would cascade down from rich to poor, and that those displaced would just walk into another job that pays just as well.
Indeed, all the evidence so far is that the benefits of the coming change is likely to be concentrated among a relatively small elite, thus exacerbating the current trend toward greater levels of inequality.
This was an issue raised by Swiss bank UBS in a report released in Davos. It said that there would be a “polarization of the labor force as low-skill jobs continue to be automated and this trend increasingly spreads to middle class jobs.”
A similar point is made by forum founder and executive chairman Klaus Schwab in The Fourth Industrial Revolution, a book which was handed to each of the delegates at this year’s forum.
Schwab compares Detroit in 1990 with Silicon Valley in 2014. In 1990, the three biggest companies in Detroit had a market capitalization of US$36 billion, revenues of US$250 billion and 1.2 million employees.
In 2014, the three biggest companies in Silicon Valley had a considerably higher market capitalization (US$1.09 trillion), generated roughly the same revenues (US$247 billion), but with about 10 times fewer employees (137,000).
It is easier to make money today with fewer workers than it was a quarter-century ago. Setting up and running a car company was an expensive business and required a lot of workers. A company that makes its money out of a smart app requires less capital, does not have to pay for storage or transport in the way that car companies do and incurs virtually no extra costs as the number of users increases.
In the jargon of economics, the marginal costs per unit of output tend toward zero and the returns to scale are high. This explains why tech entrepreneurs can get rich at a young age.
Technological change has always been disruptive. There was a polarization of income and wealth in the first wave of industrialization at the beginning of the the 19th century, and this gave rise to political and institutional change over the 100 years between 1850 and 1950: the spread of democracy; the emergence of trade unions; progressive taxation and the development of social safety nets. These helped create bigger markets for the consumer goods that were spawned by the second Industrial Revolution: televisions, radios, vacuum cleaners and the like.
However, over the past four decades, a political model that both facilitated the spread of technology and provided some protection against its disruptive consequences has come under attack. Welfare states have become less generous, levels of long-term unemployment are much higher, taxation has become less progressive and politics has increasingly been dominated by those with the deepest pockets, who can lobby the loudest.
“We need some governance to ensure a democratic evolution and that requires public policy discussion. There is the opportunity to shape technology to improve people’s lives; through connectivity, education, health. We shouldn’t be fearful and fatalist about it,” said Philip Jennings, general secretary of the global UNI union.
There is, though, a third and final myth: namely that all would be well provided the fruits of an economy dominated by artificial intelligence and smart robots can be redistributed, perhaps through a citizen’s income so that everybody can have more leisure time when machines do all the work.
However, redistribution, even assuming it happens, is only part of the story. Making his first visit to Davos, Archbishop of Canterbury Justin Welby said the changes likely to be brought about required not just an economic, but also a spiritual, response.
“This is not just about money. It is about what it is to be human,” Welby said.
“The changes are so profound that, from the perspective of human history, there has never been a time of greater promise or potential peril. However, my concern is that decisionmakers are too often caught in traditional, linear — and non-disruptive — thinking, or too absorbed by immediate concerns to think strategically about the forces of disruption and innovation shaping our future,” Schwab said.
He is right, although there is a simpler way of putting it: Faced with the challenge of disruptive new technology, the current political framework is no longer fit for purpose and its shortcomings are likely to lead to a backlash that could turn nasty. That should concern not just Schwab and the Archbishop of Canterbury, but also the investment bankers of Wall Street and the tech billionaires of Silicon Valley.
Larry Elliott is the economics editor of the Guardian.
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