Some economists appear stumped by the lack of productivity improvements in the post-recessionary era.
We could chalk that up to a statistical blip if it were a single year; productivity data are notoriously volatile. But this has been going on for some time. From 2011 through 2015, the government’s official labor productivity measure shows only 0.4 percent annual growth in output per hour of work. That’s the lowest for a five-year span since the 1977-to-1982 period, and far below the 2.3 percent average since the 1950s.
The data are well explained not by averages but by long economic cycles. The beginning of a cycle is expansionary and inflates the economy as a new technological disruption takes hold.
Later, with the disruption well distributed through the economy, efficiencies gained through automation and lower costs gained through commoditization produce higher rates of capital efficiency. That efficiency goes to the owners of capital not to labor. So the apparent low growth in output per hour of work can be explained by automation or letting machines do more work. This sheds jobs keeping labor participation relatively low and prevents wage increases as labor is relatively abundant compared to demand.
Interestingly the 1977 to 1982 period corresponds to the early days of the current era of Information and Telecommunications. Here we go again.
I have previously argued that economic cycles last a long time, on the order of a half-century, so very few of us have clear memories of the last time the economy turned over and made everything new again. We have a rich array of historical documentation but even that’s insufficient for giving you a feeling for what represents change.
It may well be that what we are seeing is the equivalent of an economic pause caused by a cycular transition. It’s a time when a technology cluster is emerging with apparent disruption just around the corner, but which is taking time to take hold, bring new businesses and models into view.
The example of chip power
An economic age is the tangible part of a long economic cycle. It requires several factors to be in place to justify the name. These factors include disruptive innovations, infrastructure investment, and massive job and industry creation.
What propelled the information age wasn’t the computer though that was a major component. The same goes for software, cell phones, and communications satellites. The disruptive innovation that kicked off the information age was the silicon chip co-invented by Jack Kilby of Texas Instruments and Bob Noyce co-founder of Fairchild Semiconductor and later, with Gordon Moore, of Intel. Moore also claims title to Moore’s Law describing the industry’s exponential growth.
The chip was important because it shrunk the cost of the then conventional computers by several orders of magnitude in addition to making them faster. Once the cost of chips reached a point where the super expensive mainframes of the time were disrupted, we started to see exponential growth and the 'information age' started in earnest. That was around 1970.
Bear in mind that the chip was invented in the late 1950’s and patented in 1959 yet it took over ten years for this disruptive innovation to diffuse into the economy enough to become an economic driver.
Some amount of lag time is common to rolling out disruptive innovations and the lag is inversely proportional to the amount of investment required of the end consumer. Enterprise computing diffused quickly while uptake of machines for personal use took longer.
So here are the three essentials we need in place before calling a new economic wave.
A disruptive innovation represents technology on which much else is based that diffuses through the economy over time.
Think about building the electric grid or cable, and more recently, the silicon chip, the last two happening in our lifetimes.
In reality, it’s a cluster of innovations that make the economic turn possible. For instance, once we had the ability to make chips, we needed software and storage systems. We also had to find ways to build internal infrastructures for computer rooms and also had to run cables and train users.
Going back in time, the assembly line created an opportunity for a manufacturing era, but it was dependent upon the electric grid to light and power assembly lines, and a variety of motors to drive handheld tools.
Continuing this train of thought, you can argue that Henry Ford's greatest innovations had little to do with manufacturing on their own, but a full rounded business model that included doubling the pay of employees so they could afford his own cars. In a virtuous circle, the assembly line drove productivity that lowered car prices and made the pay increases possible.
Readily available capital seems obvious in modern markets but venture capital, a key component fueling innovation is a relatively new, 20th-century innovation. Prior to, investors formed joint stock companies for instance to finance a trading expedition to Asia from Europe. Such a trip would take a few years, quite a little time comparatively. Those investors tended to do spectacularly well very quickly or lost everything, just as quickly.
Today financing has to survive decades because a disruption often requires massive infrastructure investment and time to diffuse throughout what has become a global market. Infrastructure projects are expensive and drive employment in jobs related to construction as well as more directly in the disruption itself.
Some new jobs are temporary but fundamental infrastructure investments such as power grids, arterial roads and railways represent advances in a society’s productive capacities. When the temporary jobs cease it’s reasonable to think that these investments have opened up new productive areas that will further absorb labor.
The economy grows as new industries hire and build infrastructure to support the disruption‘s diffusion throughout the economy.
Capital injections that create a demand for workers eventually lead to inflation as demand for consumer goods outstrips supply. When the infrastructure build-out is completed, disruptors turn to automation and efficiencies to pare back overbuilding.
In the second half of an economic cycle, further efficiencies only serve to make the original investments more valuable and profits accrue to capital not necessarily to labor.
Next comes commoditization, the original innovation saturates its market, prices drop and the innovation is no longer capable of leading the economy. That’s effectively the end of a 50-year cycle and it approximates our current condition.
Waves, consolidation, and jobs
Disruptive technologies drive economic waves that result in prosperity for a time.
The waves are usually refreshed every 50 to 60 years. But when is a disruption insufficient? If the disruption is only a form of commoditization, it might not inspire new industries and the jobs they spin up. Without those things, you don’t get the spending and inflation that are key to economic advancement or societal prosperity.
For instance, candidates for the next disruption might include IoT and analytics, but today, both look awfully like an information technology driven commoditization. They reduce process costs by continuing automation trends started earlier but what else? Both require continued build-out of the existing IT infrastructure, an important requisite. Today, each can be achieved through cloud computing which is itself a technology commoditization. A double whammy?
Unemployment might be at levels that connote to the U.S. and UK governments' view of full employment. But while we know that having a job is important for general well-being, having a job that challenges and uses a person’s skills to the best of his or her ability takes us a step further. Right now, that secondary impact hasn’t materialized.
There are also question marks over whether government figures can be relied upon or whether they have been massaged through policy and definitions that don't reflect reality.
For all the discussion about the economic situation in the U.S. and UK in particular, it is easy to forget that in many countries, double-digit unemployment persists while the record refugee population remains a stain on the world.
Beyond jobs, there is a pressing need for improving the productive capacities of all nations. Example: if what used to be a 30-minute commute takes one or two hours, it’s not a productive or satisfactory use of time. Is it any surprise then that homeworking has risen in popularity, even when that means social isolation?
As I said at the top of this story, your worldview might be different. The economic cycles discussed here are governed by the free market, not by governments. We can see the downside effects of the information and telecommunications age winding down and we can forecast, based on prior experience, the general shape of the next upturn. A cluster of new technologies and services based on a need for a more sustainable ecosystem and economy is already in view that fits the parameters of a next wave.
Next time, we’ll take a look at what I believe the next move will look like.