Regime Change — Technology Style
I have mentioned many times here that one of the ways in which economics has ventured astray is in its selection of capital and labor as the core constituents of production. These are, to me, political and not economic quantities. They are, at best, an approximation of reality and the farther we venture from the origins of modern technologically driven economic development the less useful the approximation becomes. This is because they draw a veil over the essence of what went on: the first great wave of industrialization — the first great technological regime to borrow a phrase from Nelson and Winter — was centered on the substitution of different sources of power to drive production. It was the harnessing and application of new sources of energy that defined this first regime.
For most of history the energy needed to do the work necessary for human subsistence came in an animate form. Either human or animal muscle power provided the energy to convert the natural world into something useable by our ancestors in their quest for survival. Through the course of millennia wind and water were also tamed to assist, but even so most work was done by muscle.
It was natural, therefore, for the earliest economists to look on labor as a primary input to production. Their error was that they did not think more deeply and look beyond the obvious. Energy, not labor, was literally the motive force getting work done. That humans provided much of that energy was a result of the ancestral technological regime about to be overthrown by the technological revolution wrought by the introduction of machinery and the more advanced sources of energy — steam being the iconic one — that swept to the fore in the late 1700s and early 1880s. The industry revolution rode on a wave of new energy sources. The attachment of machinery to those new sources allowed the entire framework of industrialization to blossom. The factory, the re-arrangement of the workplace, and the new institutions needed to manage assembly and distribution on a large scale were all a consequence of the harnessing of energy to do work on a hitherto unimaginable scale. Our modern world is a reflection of our success in developing and using new sources of energy to do work.
Economics was invented during the early years of this industrial flux in order to explain the consequences of what was going on. It took onto itself the task of giving a formal explanation of the benefits of the application of energy to extract more work from what it took to be the fundamental inputs to production. It was particularly interested in explaining that the movement of labor from older ways of production to newer ways of production was not a loss but a benefit. To do that it developed an obsession with productivity and efficiency. It is no coincidence that efficiency and maximization emerged as central objects of analysis for early economists. Their scientific milieu was deeply infused with the contemporary work of physicists who were busily explaining those same concepts in the context of the modernization of physics. Work, efficiency, and maximization were naturally attractive to economists as they tried to understand the emerging industrial economy. The problem was, as I mentioned above, that they lost touch with energy as the prime input. They focused instead on the political problem of the upheaval implied by the shifts in labor from the old ways to the new ways.
This forgetting of the prime inputs bedeviled economics right through to its development of growth theory in the postwar years. By sticking with the political or social constructs of capital and labor, neither of which are particularly precise, economics limited itself with the consequence that it had to accept a “plug” in its equations when explaining growth. No combination or amount of either capital and labor could be devised to explain modern growth. There was always a very large — absurdly large at times — residual that has become known as total factor productivity [TFP].
I have always wondered why the emergence of TFP did not force economists to question the basic quantities they were dealing with. Surely this should have been a moment to go back to the drawing board.
Which brings us to the second great technological regime. The regime change we are living through.
The first had been focused on energy. The second has been focused on the other fundamental input into production: information.
Having cracked the importance of motive power and its application to mechanization as a solution to the problem of increasing production from limited resources, in essence solving the infamous economic problem that has dogged humanity throughout history, we turned our attention to the less material input. This was necessary because of the complexity introduced into the economy by successive waves of specialization, division of labor, and thus increased interdependency caused by industrial production on large scale. Such complexity highlights knowledge, information, and organization as economically interesting entities. Coordination of industrial processes became a problem of central focus in the practical world of production. The softer technologies of management or information processing and their associated methods rose to the fore in the same way that the harder technologies of machinery and energy had risen in the first technological regime.
This second technological regime — the one we have been living in for some time now— has become one in which the study of knowledge and information are vital to continued development. TFP is, in large part, a reflection of this shift in emphasis. Our emphasis is increasingly on technique and on various ways to combine sources and kinds of information to create and manage products. Yes, we continue to automate work to extract ever greater productivity from the material world, but our more immediate emphasis is on extracting greater value from the information that we have in abundance around us.
But we are still new to this problem and much of our theory is inherited from the first technology regime. In particular our understanding of economics is still rooted in those ideas of efficiency and maximization which, themselves, were presented as solutions to scarcity. Inducing greater production from scarce resources requires some notion of a closed system that can be “maximized”. However distant this idea is from reality it has uses when resources are scarce. So does the more modern notion of a firm which is a method of closure around a set of processes. At its most basic scarcity itself provides a closure to the system being maximized. That condition no longer exists in an information based economy. Information is boundless and is not reduced through use. Increasing not diminishing returns dominate. Connectivity matters more than isolating processes for discrete management. Networks are paramount. The information content of our products is increasing as information technology makes complexity more tractable to exploitation. Production has always been implicitly algorithmic. Now it is explicitly so.
In an odd way this reverses one of the core values of management.
In an industrial process where most value is created by emphasizing predictable, replicable, and scale, what I call primary knowledge [PK] dominates. Indeed the entire purpose of a business firm is to turn discovery or innovation into predictable activity. In my schema the knowledge needed to innovate, adapt, or discover is secondary [SK]. This schema differs from that based on Michael Polanyi’s description of tacit and explicit knowledge. My focus is on the management process. Secure and successful exploitation of discovery depends on being able to translate the SK based adaptations into PK based routines that can be replicated en masse. Efficiency is based on the more effective application of PK. In contemporary wording: PK is the code of production.
The problem with PK, or any code, is that its utility depends on its context. Just like any supremely efficient entity its efficiency is simply a reflection of the system within which it emerged or was created. Change the context and the erstwhile efficiency may suddenly become a hindrance. PK or any code can become obsolete quickly. To use Schumpeter’s insight: creativity, by changing the context, destroys what was once an efficient solution to a problem. Creative destruction eliminates successful adaptations. It does not eliminate poor adaptations because they have been eliminated already by their successful competitors. Creativity is a threat to the successful not to the failed. Novelty turns success into failure inevitably.
Which, if we think about it for a while, produces a conundrum: to be successful in a rapidly changing context we need to be less efficient. We need redundancy. We need to be adaptable. So instead of building successful processes by translating discovery into manageable predictability [i.e. an SK to PK orientation]; we reverse things. We need to abandon a search for efficiency, we need to accept generalization in order to search for novelty. We must forgo the predictable and manage discovery based upon a framework that changes constantly [I.e a PK to SK orientation].
Meanwhile if the foregoing holds any truth at all it is that we have conquered the economic problem. We have overcome nature’s most immediate threats to our subsistence. Industrialization was a success. Now we must clean up its unintended consequences. But the threat of famine no longer hangs over us all in the way it once did. Our issues are now political: how do we manage the abundance so that we all share in it?
Which brings to mind Keynes’ somewhat pessimistic view of how we are likely to deal with abundance. In his wonderful short essay “Economic Possibilities for our Grandchildren” which struck an optimistic tone with respect to our ability to overcome the economic problem, he cautioned us. He told us that we already have a glimpse of how humanity might deal with abundance. After all the wealthy live in such a world already. They are, in his words, our advance guard in such a world of excess. And they aren’t doing very well. His words from 1930 …
“To judge from the behavior and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing! For these are, so to speak, our advance guard — those who are spying out the promised land for the rest of us and pitching their camp there. For they have most of them failed disastrously, so it seems to me — those who have an independent income but no associations or duties or ties — to solve the problem, which has been set them.”
Our second technology regime, this Digital era, is where we solve this problem. So far, judging by the continued excessive focus of digital technologies on yet more automation and thus production of more wealth for the wealthy, we are not doing very well. Keynes was right in his judgement.
Addendum:
That we have solved the economic problem is reflected in the amount of human labor we allocate to the production of basic or subsistence material. Industrialization or mechanization allowed the massive reduction of humanity involved in food production. Then it allowed the equally massive reduction in the numbers of people involved in the production of the more material aspects of modern life. These shifts of labor first from agriculture to industry, and then from industry to “service” are a triumph of technology. It is no wonder that we give science and technology a prime place in our current worldview. Whether they stay there will depend on their usefulness in solving the post-scarcity issues that afflict us. Perhaps it is an irony that we turn to technology to solve the environmental degradation that technology produced as we sought to break free from nature’s grip. Nature surely has a way to remind us that we have always to take it into account! After all the threat is not to nature, but to us.
Nor ought it surprise us that in a post-scarcity world social and political issues emerge as those that most in need of urgent attention. We have enough. Now we need to resolve who shares in that abundance. What use is technology in resolving that problem? Especially when, as in recent times, far from being a force for democratic unity, certain technologies seem all too easily to undermine the solidarity we need to live in a world of shared affluence.
