The Second Economy

Here's a fascinating essay by W. Brian Arthur in McKinsey Quarterly (via Walter Russel Mead). I've read Arthur's book, The Nature of Technology: What It Is and How It Evolves which was excellent. Here he turns to the future.

With the coming of the Industrial Revolution—roughly from the 1760s, when Watt’s steam engine appeared, through around 1850 and beyond—the economy developed a muscular system in the form of machine power. Now it is developing a neural system. This may sound grandiose, but actually I think the metaphor is valid. Around 1990, computers started seriously to talk to each other, and all these connections started to happen. The individual machines—servers—are like neurons, and the axons and synapses are the communication pathways and linkages that enable them to be in conversation with each other and to take appropriate action.

It could lead to a much more productive and wealthy world. But the consequences for jobs could be serious. He argues the primary cause of downsizing since the 1990s has been that jobs are disappearing into the "second economy", i.e. the digital economy.

This suggests to me that the main challenge of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem. For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking—fewer of us in the future may have white-collar business process jobs—and we face a problem. ...The system will adjust of course, though I can’t yet say exactly how.

This is exactly the question at the heart of this blog. Arthur even goes on to reference Keynes' Economic Possibilities for our Grandchildren.

He has a few brief thoughts about the way forward. Maybe a major new source of jobs will be discovered, he says. Maybe we'll take more leisure time. Maybe the very idea of a job and productivity will change in important ways.

In some ways, Arthur isn't adding anything new here. Everyone can see productivity trends and automation are causing more problems for the traditional economy, and the pace of change is so fast that even if new major sources of jobs do arise, the adjustment is abrupt and wrenching. the question is what we should do about it. But at least he is asking the question.

It is actually remarkable, when you think about it, that such a distinguished researcher drom the Santa Fe Institute, publishing in a McKinsey periodical does not have a clearvsense of the way forward. It just shows how much needs to be done.

His metaphor that the economy developing a nervous system is very appealing, however.

I think he is half right in saying that the key question of the economy is moving from production to distribution. For sure, distribution matters. I think that is one reason I've found myself looking so much at political philosophy so far in this blog.

It also underlies the huge controversies on Capitol Hill about taxation and the size of the state. Income redistribution in the post-war liberal way is increasingly unviable politically, for reasons I've discussed.

But more important than distribution is the question of what we want. What is our purpose, what are our preferences, what do we want out of the economy? Simply redistributing dollars is no answer at all. Instead, it is about the ways of life we lead.