I think that Tom Friedman’s Theory of Everything is a very well-written piece that explores how globalization and the democratization of information and communication technologies are the leading drivers of the period of global economic and political disruption we find ourselves in. However, I was a little disappointed that he did not portray current events in the context of previous periods of economic and political disruption where technology played a role; I believe that historical parallels offer us both a greater level of understanding of the challenges we face and a way forward that leaves us all better off in the end.
The obvious parallel would be the industrial revolution of the 18th and 19th centuries. Though not that long ago, the substantial challenges we faced as new technologies were adopted the world over seem to be forgotten. Steam powered ships, railroads, and eventually the internal combustion engine brought the world closer together than it had ever been before. Coupled with advances in manufacturing technologies, it became more efficient and inexpensive to produce goods centrally and transport them to where the demand was, then to produce them locally. As a result, there was an enormous demand for labor in centralized factories while independent craftsmen were unable to compete with the more efficient means of production. As a result, populations migrated to the factories (often located in cities). The difficult transitional period that began with the earliest factories and did not really end until the beginning of the 20th century is often forgotten or glossed over, despite it being a very interesting parallel to our present situation.
What is not widely known about the industrial revolution is that a large percentage of the population (at the bottom of the economic pyramid) was initially worse off despite average real income per capita increasing in industrialized economies through most of this period. Working conditions were abysmal and dangerous and living conditions in the cities deteriorated for many (the slums). Pollution became an issue. By the end of the 19th century (during the so-called second industrial revolution), technology-driven productivity increases caused substantial increases in unemployment until demand caught up with the new production capacity. But, it was impossible to ignore that the overall economic pie was expanding even as it was being divided increasingly unevenly. In the end, we take for granted that the vast majority of us are better off because of the accelerating pace of technological innovation over the last ~300 years. But, it was a combination of the social and economic innovations, and people’s willing to adapt to the new normal, during the difficult transitional period that made such an outcome possible.
The formation of unions helped workers obtain improved working conditions and increases in wages. Since factory jobs did not necessarily require difficult to obtain skills, those who would previously have been independent craftsmen were able to migrate to the factories and adapt to the changing source of income. Governments, particularly in the US and UK, began to regulate smoke emissions by the end of the 19th century. Increasing literacy rates (access to public education) and disruptive technological change created opportunities for entrepreneurs outside of the aristocracy to achieve social and economic mobility (the birth of the American Dream). It is possible to imagine, in hindsight, that governments could have shortened the difficult transitional period by promoting policies that accelerated these developments.
The telegraph, radio, television, and later the Internet were the earliest stages in the information revolution we find ourselves in today. Coupled with commercial aviation, other improvements in transportation and logistics, and international business-friendly policies being adopted in formerly closed economies, the world is once again brought closer than ever before. Except, instead of centralized factories being the most efficient means of production in the information and services economy, distributed workforces that benefit from lower regional labor costs and communicate using modern technologies are the new productivity enhancement. For industrial manufacturing, factories can be strategically located, globally, to minimize production costs.
These changes have already expanded the pie and created several positive effects. Economic and social mobility is no longer only an American or Western norm. Economic opportunity is now global and has lifted more than half a billion people in “emerging” or “developing” economies out of poverty: China, India, Latin America, and Eastern Europe have benefitted tremendously from globalization and seen wages increase significantly. Similarly, the ranks of USD millionaire-equivalents has exploded globally as emerging markets produce opportunity for local entrepreneurs and wealth creation, and not merely low wage factory jobs. Profits for multinational corporations have increased. Access to information and new communication technologies have also facilitated democratic revolutions in the Middle East.
But, globalization has also increased wealth inequality and gutted the middle class in developed economies as their jobs migrate overseas in advance of demand catching up to the vastly increased labor supply (that now includes billions of additional people). Furthermore, sovereign debt loads have forced Western countries to make difficult choices. Some Western governments have exacerbated the problem by restructuring progressive tax structures to benefit the wealthy and paring back too hard on social safety nets. In addition, there seem to be fewer calls for global workers’ rights, even though global labor standards would help make Western workers more cost-effective on a relative basis. We should, instead, learn from the past technological revolutions and attempt to accelerate the difficult transitional period of the information and communications revolution and bring forward the time when the vast majority of people will benefit from the increases in productivity.
In the US, there are several things we could do to improve the situation. First, we need tax reform that undoes the convoluted regressive structure that favors capital over labor, which we have in place today, and ensure that the highest earners do not pay a lower effective tax rate than their secretaries. We need to push hard for global labor standards and prevent nations from competing unfairly for global trade by manipulating their currency. We need to make education accessible and affordable, to both promote economic and social mobility and make the labor market more adaptable (allowing workers to change careers in response to a labor market in flux). And, equally important, we need to bring our debt and future liabilities under control (through both tax increases and entitlement reform) to give us the ability to react more nimbly to a dynamic and rapidly changing global economy, and invest in the technologies that will be the basis for future “revolutions” and continue the long-term trend of increasing per-capita income and global standards of living.
They say that “those who cannot remember the past are condemned to repeat it.” Hopefully, we can learn from prior technological revolutions, ease the difficult transitional period, and help everybody benefit from recent increases in productivity.