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The Tech Revolution's Disruptions Begin

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The high-tech revolution that began in the final decades of the 20th century is once more gaining momentum. The Nasdaq Composite index is approaching its heady heights of March 2000—except this time the bull market in high-tech shares is being driven by profitable companies with proven business models. More to the point, the changes wrought by the IT revolution are starting to cause social disruptions that may eventually prove even more severe than those of the industrial revolution 200 years ago.

Industrial Revolution 2.0

Until the second half of the 18th century, economic value was produced mainly by the physical labor of humans and domestic animals, with the help of primitive implements and tools. Then came the industrial revolution and by the middle of the 19th century Europe and North America entered the age of the machine, with industrial equipment, steam engines and other technology taking over production and changing the economy.

But machines mainly replaced or enhanced the productivity of physical labor—even though by the second half of the 20th century they became extremely complex and efficient. Still, human input was required to organize and manage production, set up logistics, operate machinery, control quality and perform a variety of sophisticated tasks.

A new, qualitatively different stage of the industrial revolution, the development of electronics and information technology, started around 1980. While the mechanical civilization dealt mainly with physical processes, the new digital civilization began optimizing and supplementing higher quality “mental” activities: computation, data collection and processing, analytics, communications and management.

Our bodies limit our abilities. We can’t cover long distances on foot. We are weak and perform physical tasks slowly. The mechanical civilization addressed our physical limitations, but our mental shortcomings—such as short-term, selective memory, inability to perform more than one task at a time and lack of long-term concentration—hinder us to a much greater extent. Digital technology for the first time in history started to enhance mental processes and take over many tasks that only human beings had been able to perform.

Digital technology is completing processes that began in the 19th century, when agricultural production shifted from a highly labor-intensive activity to a mechanized one, gradually freeing millions of former peasants for jobs in manufacturing. Now, it takes less than two man-hours to produce 100 bushels of corn, versus 100 man-hours in the 1930s.

North America, the most advanced agricultural region in the world, employs less than 1% of the workforce in agriculture, and even as farming employment shrinks, crop production keeps rising. Corn and wheat production increased 5–10 times over the past 30 years while acreage shrank substantially thanks to the growth of residential areas. In 2013, farmers’ incomes measured a record $131 billion, more than $40 billion above the previous 10-year average.

The leader in the mechanical age was General Motors, once the world’s largest industrial company, employing 600,000 in 1979. The best symbol of the new digital age is probably Apple, which has no manufacturing plants and just 80,000 employees—many of them in its retail network—each generating over $2 million in annual sales and nearly half a million dollars in profits.

Apple’s profit margin is approximately 30%, while the Chinese manufacturer of many Apple devices, Foxconn, has to be content with about 1–2%.

A city symbolizing mechanical civilization was Detroit, which shriveled over the past three decades, losing some 60% of its 1.8 million population. San Francisco and New York epitomize the electronic age. They are multicultural and international, and London has become Europe’s success story for the same reasons.

Wither the State

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Karl Marx, writing in the midst of the industrial revolution, described the state as a machine for the oppression of the working class by the bourgeoisie. He claimed that it will eventually disappear—along with social classes.

In fact, during the age of the machine the state played a crucial role. Economic activity required a high level of organization, centralization and concentration of production. The state provided a variety of key services to industry, ranging from the transport and energy infrastructure to universal high-school education for industrial workers. The state also acted as a go-between when workers and their unions had acrimonious labor disputes with employers.

The digital civilization requires a completely different form of social organization. The innovation-driven economy makes a mockery of planning since no futurist could have predicted how IT, the Internet, biotech and mobile telephony would develop. The economic and organizational role of the state has been greatly reduced and it has become an impediment in an environment that prizes personal initiative, original thinking and risk-taking.

It is certainly no coincidence that the backlash against the bureaucratized, tax-and-spend state began in 1981, the year when Ronald Reagan moved into the White House and the first IBM PC went on sale. Ironically, it’s been the second stage of the industrial revolution, and not a revolutionary uprising by the proletariat, that is bringing about Marx’s “withering of the state.”

Job Destruction

Some analysts worry that investment in high-tech is slackening and that productivity improvements seen over the past two decades may start fizzling out. Indeed, in the 1975–90 period, investment in high-tech grew by an average of around 15% a year in real terms, slowing to 5% after the 2000 dot-com bust and coming to a near-standstill over the past five years.

But by other measures, the revolutionary impact on productivity is only now starting to be seen. In this respect, the prolonged downturn that followed the financial crisis of 2008 has been crucially important. Weakness in job-creation represents a major structural change. In 2007–13, the economy grew by 6% in real terms, but the number of jobs fell by 1.5%. GDP per employee increased by 7.5%, whereas real wages grew by just 1.7%, indicating that steady economic growth has been achieved without boosting demand for labor.

In fact, the U.S. auto industry revived with a minimal increase in the labor force—and at least some of the new jobs were created as a political concession to the trade unions on the part of the Detroit Big Three management.

And autoworkers should consider themselves lucky. Entire professions have been largely eliminated since the start of this century, and the process has been accelerating since 2008. Secretary positions have all but disappeared, the ranks of journalists and photographers have thinned, and there is less work for printers, designers and mail carriers. The publishing industry has been in a protracted crisis, and the retail industry is undergoing structural changes as well. Shopping malls are closing down, while sales volumes at online stores are rising. Amazon has built a network of fully automated warehouses, which execute customers’ electronic orders with little or no human involvement.

Amazon, a key customer of home delivery services, is experimenting with automated delivery as well. Drivers may be the next profession at risk, as Google, along with several automakers, is developing driverless vehicles.

Even greater problems are potentially facing China, where millions of peasants moved to the industrial centers over the past quarter of a century. Beijing wants to accelerate this process and to resettle another 250 million people in the newly built cities in the next 12 years. By 2025, 70% of the population will be urban, versus 50% today. At the same time, new technologies, such as robotics and three-dimensional printing, are effectively eliminating China’s cheap labor advantage. Production—albeit without jobs—is starting to move back on-shore, closer to the consumer markets in Europe and North America.

Revolutions tend to be accompanied by severe shocks. The industrial revolution brought about a period of unprecedented peace and prosperity in Europe in the 19th century, but then, in the 20th century, the established world order was torn apart by wars and civil conflicts. The digital revolution has so far been peaceful, enhancing prosperity around the world. However, dangerous fault lines have also started to appear.