What Could Trigger a 4th Industrial Revolution?

There’s been a lot of chatter in recent years about the “new normal” and the “end of growth” where the world just enters this stage of permanent stagnancy.  It all sounds plausible and has become increasingly popular as the temporary balance sheet recession creates the impression that today’s environment is going to last forever.  I don’t believe that’s true.  And while I like to focus on downside risks, I think it’s also prudent to consider the upside risks.

Anyhow, in a recent piece, Dr. Krugman links to a paper by Robert Gordon that discusses the future of US growth and the potential for this permanent stagnancy.  In it he discusses the stages of growth in the USA:

“The analysis in my paper links periods of slow and rapid growth to the timing of the three industrial revolutions:

IR #1 (steam, railroads) from 1750 to 1830;
IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and
IR #3 (computers, the web, mobile phones) from 1960 to present.”

Now, it’s important to keep things in perspective.  The USA has experienced unprecedented growth in its short history.  This nation went from not existing to being the world’s super power in just 150 years.  That’s not amazing.  It’s almost unbelievable.  And the unfortunate thing about being #1 is that there’s only one direction to go.  So it’s not surprising that this mature economy is slowing to some degree.  Competitiveness and the maturation process make this inevitable.

And as the US economy has matured it’s also changed in big ways.  It’s moved towards more of a services and consumption based economy.  Again, that’s not surprising.  But does this mean the economy is stuck in a phase of permanent stagnancy like an old value stock that can’t produce like it used to?  I don’t necessarily think so.  I am not sure what could spark a 4th industrial revolution, but I presume it will likely involve the continuing evolution away from IR #2.  For instance, imagine an economy that is unleashed from the chains of crude oil dependence.  I don’t know the technology that will achieve that (or if it’s even plausible), but I think that’s the most obvious upside risk here.  We’re talking about input costs and consumer burdens that would be passed onto everything else in the economy.

Paul Krugman and many others think we’re moving towards some sort of robot run world where we don’t do anything and GDP is generated by machines.  I don’t think so.  I think the more likely scenario is that we’re headed towards a world where machines make us increasingly efficient (just as the phone replaced the messenger, the washing machine replaced the laundromats, etc) and we obtain more time to consume more future goods and services.  It’s not the end of the economy.  It’s a changing economy.  And as always, technology and progress will set us free.  Not hold us back….

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Since it’s becoming more and more clear that there is no motivation currently to do anything about global warming and CO2 production then we are going to have an enormous growth of “weather refugees”. Particularly in low-lying areas near the ocean and coral atolls, I wonder what is going to happen? If governments don’t spend “money” into these newly broken economies, where are the funds to cope with this going to come from? In the face of a worldwide balance sheet recession inextricably linked to debt service, how does our MR understanding help us have a Merry Christmas? There has got to be good ideas here, correct? Would this huge change in inhabitable geography create a 4th industrial revolution?

  2. Among pervasive pessimism, it is good to read well reasoned optimism. If the USA retains a modicum of free enterprise and a “freedom differential with Europe”, the positive scenario is likely to materialize.

    Regards.

  3. Pump the country full of lead and completely rebuild our nation’s infrastructure. High speed trains, more subways, more efficient bridges. Invest in alternative energies, education, production, etc. We are stagnant because people have figured out it’s easier to make money doing nothing (financial industry, banking, govt, etc). They should figure out ways to build more big industrialized cities that don’t have advantages of ports by providing them more infrastructure and incentivising production in America.

    Invest in alternative energies. The country that finds a solution to not being dependent on oil will change everything.

  4. One thing odd about the last 5 years is how almost no one talks about R&D spending. We’re worried about unemployment, social security, payroll taxes, capex … When was the last time you saw a plot of R&D/GDP, patents/GDP etc. It’s almost like R&D doesn’t exist (maybe we should require it to be capitalized for NIPA?).

  5. Cullen,

    I adore your stuff. Please keep it coming. I’m not an economist or financial guy by education, nor am I a historian. However, a couple points, as I’ve often considered this issue myself. First, the initial industrial revolution was really started with water power. Rather than the power source itself (water has been used for millennia) during the 18th and 19th century, it was harnessed by engineers to an unprecedented degree. The water wheel was the beginning of the industrial revolution and that phase culminated with the invention of the water turbine (early 1800s.) Soon AFTER that, steam was harnessed, transportation exploded with trains and boats. I would argue that the internal combustion engine, etc. was the 3rd wave. Now we have technology, which I’m guessing has only partially been utilized for productivity gains (I’ve seen a huge amount of money wasted on technology.) It’s improvements to productivity are only starting.

    If you consider transportation after the invention of the internal combustion engine……… Much of the early days were just a novelty, rich guys bought inefficient cars with which to putter around. Eventually, roads improved, trucks came to be, and suddenly huge efficiencies accrued. The interstate highway system brought huge efficiencies.

    If you can say that the full benefit of computers has already been realized, perhaps you’re right. But I doubt it. There are all kinds of companies out there running on good-old-boy methods, where their computers are just “oh yeah, we got that.” Harnessing that tech by small business is still a long ways from being optimal, IMHO.

  6. ” I think the more likely scenario is that we’re headed towards a world where machines make us increasingly efficient (just as the phone replaced the messenger, the washing machine replaced the laundromats, etc)”

    Yes, and so does Govt Control over us become more efficient

    “we obtain more time to consume more future goods and services.”

    And get lazier and fatter and create more health issues or a reason for Govt to guide our lives thus actually becoming the Organic Robots controlled by the digital one’s.

    “It’s not the end of the economy. It’s a changing economy. And as always, technology and progress will set us free. Not hold us back….”

    Does technology really set people free or merely create an illusion that they are?
    Look around you in public, are all those people staring glass eyed into their smart phones really free, or actually held captive? Held by the world we fool ourselves into thinking we have mastered.
    Just a thought.

  7. It’s hard for me to see continued economic growth without income growth for the bulk of our population. If new wealth goes to an increasingly smaller group of high earners and productivity improvements push more people out of the middle class, there simply won’t be sufficient consumer demand to to fuel growth.

    For growing numbers of people, the current system just doesn’t work. If they see a future that promises to further ratchet down their incomes and increase income disparity, they will demand change, whatever that may be.

    So in my mind, the biggest risk we face is the real chance of political instability, which trumps everything else.

  8. Some Fantastic “technology” quotes from notable people over the last century:

    It has become appallingly obvious that our technology has exceeded our humanity.
    Albert Einstein

    The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.
    Bill Gates

    Everybody gets so much information all day long that they lose their common sense.
    Gertrude Stein

    Haha, Love it:

    The real problem is not whether machines think but whether men do.
    B. F. Skinner

    Technology is making gestures precise and brutal, and with them men.
    Theodor Adorno

    If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner.
    Omar N. Bradley

    Tons more of the great tech quotes out there folks from peoples of generations before ours. I would encourage you to seek them out and learn because as I have just learned. Technology has brought me my first Christmas where all I saw at the family gathering were teen age foreheads because their eyes were staring into a glass world of self. They were simply unaware that life was actually all about them for free and live in color..

  9. One thing that isn’t addressed in this piece are the costs from greater efficiency attained through technological advancements. On one side there is technological revolution where efficiency is greatly improved, but on the other hand you have a mass of skilled labourers who no longer have a job. China’s rise to great prominence in the 20th century had been on the back of it labour force, or rather, it’s cheap labour force. The US decline has been on the back of stagnant growth. So I fail to see how technological advances will pull the US out of its decline. It really is a brave new world, where most industries and manufacturers will rely heavily on machines and technology, but this shouldn’t be seen as an advancement per se, as the adoption of these technologies has come about from the need to lower costs due to core principles of capitalism in which most modern western economies exist.

    When machines can build roads and bridges, build and repair ships, block cement and put up buildings, print car parts and even whole moving parts, all under the supervision of a handful of highly trained individuals/operators, where does that leave human capital? It’s a very scary prospect.

  10. R&D spending are at the lowest level in 30 years in many key sectors because the government “must be thin and spend less” and no private will ever invest in sectors where returns are tens of years in the future and uncertain anyway. ALL and I mean ALL the key developments in the post WW2 period have been possible because of massive public investments in research, education and projects like Apollo, Darpa etc… that are now impossible. Instead trillions have been found for the bankrupt finacial sector that is day after day killing our nations.

  11. Finally someone who is able to use his brain for thinking. All the tech we need is here, what we need is the intelligence to use for the better. A little less warming in winter and a little less cooling in summer will save us trillion of BTU, but our civilization needs wasting so that we continue to speak about growth. Inefficient growth is not useful and we don’t need more tech for this, we already know what to do, but we don’t have the will to do it.

  12. Agreed. GDP continues to grow but increasingly all gains go to the top 20% and especially top 1% or 0.1% as the dominance of capital over labor only grows. Even minor redistribution is fought tooth and nail as “socialism”. And taxes on capital are at all time lows as % of GDP. The only solution we hear is to drop taxes even more on capital to “spur growth” – even though the last drop on taxes for capital in 2001/2003 spurred a ton of growth…overseas. As capital went to lower wage countries. I don’t see an easy solution in a high cost of living country as the U.S. Maybe you wait 4-5 decades for wages in China and Mexico to sort of catch up but the automation train is going to derail labor for a long time. I don’t get Cullen’s view that automation will free up time for everyone – it’s some sort of utopia where we all do service work and there is a job for most everyone since the robots create uhhh…. jobs somehow. There are even stories now of the first attempts at creating McJobs for robots – i.e. they make the hamburgers instead of humans. Just imagine losing all those jobs in say 15-20 years. Well I guess those people will have more free time to play on their iPhone 18 but again, with what wages?

  13. Please enlighten us on the CO2 fraction of the atmosphere. If you are unaware of this number you are unqualified to have an opinion on “global warming”.

    The fact that you’ve read the statement “The vast majority of scientists believe X” several thousand times does not constitute any level of scientific evidence. The statement itself is unverifiable and probably incorrect.

    “Global warming” is a propaganda campaign, and a dubious scientific theory which is completely unproven.

  14. N. Gregory Mankiw is one of the most well-known economists in American politics. A Harvard professor, he chaired George W. Bush’s Council of Economic Advisers from 2003 to 2005 and served as a senior adviser for Mitt Romney’s presidential campaign. Many observers saw him among the top contenders to replace Ben Bernanke as chair of the Federal Reserve in a Romney administration.

    But for hundreds of thousands of undergraduates, Mankiw is better known as the author of Principles of Economics, one of the best-selling college textbooks in America. Politics may have made Mankiw famous, but his book—list price: $293.95—has made him a very wealthy man.

    The Internet has made access to many kinds of information more flexible and less expensive. Novels, films, songs, photographs—all manner of things can be gotten from a broad array of providers for low prices, or for free, in digital form.

    Yet the college textbook industry has not only managed to insulate itself from this trend—it has moved in the opposite direction, using digital content as a way to charge more money.

    Now a startup called Boundless.com is trying to change that with a service it calls “textbook replacement.”

    So if you’ve been assigned to read Chapter 4 (“Principles of Supply and Demand”) of Mankiw’s book, you can simply head to Boundless and get free content that covers that same ideas and concepts,

    Naturally, the small group of major publishers that controls the lion’s share of the $7 billion textbook market is now trying sue Boundless out of existence.
    http://www.slate.com/articles/technology/future_tense/2012/12/boundless_and_the_open_educational_resources_movement_are_threatening_publishers.html

    Is this Greed? Why when technology can be used to help educate people in a more effcient manner teams of lawyers jump in and do all they can to stop it.

  15. As someone with a Ph.d. In meteorology, I can vouch that not only are you wrong and completely uniformed, but I can already see your phony argument developing about the fraction of C02 somehow debunking science which has been known and settled for over a 100 years now. It must be nice to think you are smarter than thousands of physicists and atmospheric scientists, but if you really were able to debunk the science, then by all means publish that paper and collect your Nobel prize! Otherwise, stick to deluding yourself, not others.