Musings Report #30 7-21-12 The 4th Industrial Revolution
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The 4th Industrial Revolution
What are the primary causes of the global financial meltdown we are experiencing? Some have identified the end of the gold standard (Bretton Woods) in 1971 as the key trigger of our current problems, and this certainly had some unintended, far-reaching consequences. But this is basically a claim that monetary policy undergirds everything else; it seems to me that energy is the real foundation, along with the processes of wealth creation that consume that energy.
In this view, monetary policy is reactive to changes in energy and wealth creation, rather than the driver.
I have recently been pondering the role of the 4th Industrial Revolution in the seismic shifts we are experiencing on multiple levels.
We can slice the industrial age into any number of eras, but I think a good case can be made to simplify it into four primary phases:
Industrial Revolution 1: 19th century, iron, coal, steam, rail, first factories
Industrial Revolution 2: early 20th century: integrated manufacturing, oil, autos
Industrial Revolution 3: globalization: just in time supply chains, global transport, initial phase of robotics and automation
Industrial Revolution 4: software, robotics and automation reach maturity; "3D printing" fabrication
The primary trend of industrialization is the value added by unskilled labor declines. This is an "iron law" that cannot be revoked. As the machinery of mass-production fabrication becomes ever more costly (for example, $2 billion semiconductor plants), the value added by unskilled human labor drops to near-zero. As the machinery for small-batch production drops in cost, the value added by unskilled labor also drops to near-zero.
As fossil-fueled machinery and software enter each high-labor sector, the value added by low-skilled human labor declines. This can be seen in agriculture, service industries and manufacturing itself. Currently "high value" sectors such as accounting, legal advice, medical services, etc. have yet to feel the full impact of cheap software.
In this analysis, Bretton Woods and the end of the gold standard was the result of two primary forces:
1. The U.S. began importing oil, and its exports could not match this rise in imports. That meant the oil exporters would eventually end up with all the U.S. gold. That could not be allowed to happen, so gold was no longer "money." International payments would be made with paper (dollars).
2. As the cost of energy rose and the productivity gains made by Industrial Revolution 2 dwindled, the only way to lower the cost basis of the American lifestyle was to import cheaper goods and materials from overseas. That created structural trade imbalances that have endured to this day. The U.S. could not keep paying for imports with gold (trade imbalances in the 1960s were settled with gold, at least in the case of France), nor could it "afford" to stop importing cheap commodities and goods, so it changed the global system to enable payment for goods and services with paper money.
This was a fantastic boon to the U.S., which now bought real wealth--oil, materials and manufactured goods--with paper money that could be printed electronically at will.
This explains why the U.S. is committed to maintaining the dollar as the reserve currency, and why it will not allow it to "inflate to zero" as so many hyper-inflationists believe is inevitable. If we follow this analysis, we reach the opposite conclusion: the U.S. dollar will continue rising in value as the objective is to trade this paper for real goods and commodities.
The other consequence of this analysis is that labor's ability to add value/create wealth will continue to decline. Financialization and speculative booms enabled consumption to rise enough to create service jobs, but as financialization reverses into deleveraging, the household's ability to borrow/leverage more money to consume more has reversed. Households will have less money to spend and consumption will decline.
Low-skilled service labor simply doesn't add enough value to receive high compensation. As a result, tens of millions of service jobs pay limited wages, and the number of high-skill job slots is limited. Training 100,000 biochemists does not magically create 100,000 jobs for them.
As the financialization/speculative booms reverse, consumption will decline and so will service jobs. Concurrently, software will chew through many sectors (law, healthcare, education, government services, etc.) that are currently considered "well-moated" against offshoring. Since the ability to ship these jobs overseas is limited, the high-cost labor will be replaced by software.
These powerful trends are the basis of my prediction that the number of full-time private-sector jobs will decline from 115 million to 100 million. Once the tax base shrinks, government jobs will decline by the same percentage.
The "market economy" cannot create jobs out of thin air as assets and leverage both decline, and the forces of software and automation chewing through the sectors that have been moated against revolutionary technological changes cannot be stopped.
There are limits to Status Quo responses to these profound transformations. Of the three foundations of civil society--the Marketplace, the State and Community--only community can provide meaningful work for tens of millions of people with little role in the market economy.
From Left Field
A Beijing Family’s Holiday From Pollution (via Maoxian) the rationalization is that clean air and water are "luxuries" in the industrialization phase. But when will that phase end if it is accepted as "normal"?
"Care about people's approval and you will be their prisoner." (Lao Tzu)
Thanks for reading--