Until the spasm in the markets interfered, Davos 2016 was supposed to be about how humankind will cope in the new age of the smart machine. While share prices were gyrating, the bigger picture was obscured. There is a fourth industrial revolution happening and it is likely to be as profound in its effects as the previous three.
The first Industrial Revolution was about harnessing steam power so that muscle could be replaced by machines. The second was driven by electricity and a cluster of inventions from the late 19th century onwards – including the internal combustion engine, the aeroplane and moving pictures. A third revolution began in the 1960s and was based on digital technology, personal computing and the development of the internet. Industrial Revolution 4.0 will be shaped by a fresh wave of innovation in areas such as driverless cars, smart robotics, materials that are lighter and tougher, and a manufacturing process built around 3D printing.
A pity then that the World Economic Forum was overshadowed by falling share prices and the cost of oil because the impact of the fourth industrial revolution will be felt long after investors have stopped fretting about a hard landing in China.
Davos was, in some ways, a good forum for the gathering of technology pioneers, business leaders and politicians to consider some of the implications of what will be a very different sort of economy. Just to take one example, smart machines will soon be able to replace all sorts of workers, from accountants to delivery drivers and from estate agents to people handling routine motor insurance claims. On one estimate, 47% of US jobs are at risk from automation. This is Joseph Schumpeter’s “gales of creative destruction” with a vengeance.
There are three myths about Industrial Revolution 4.0. The first is that it won’t really have as big an impact as the previous periods of change, most especially the breakthroughs associated with the second industrial revolution. In the past, it has always taken time to feel the full effects of technological change and many of today’s advances are in their infancy. It is far too early to say that the car or air travel will prove to be less important than the sequencing of the human genome or synthetic biology.
The second myth is that the process will be trouble free provided everything is left to the market. It is a fantasy to believe that the wealth created by the fourth Industrial Revolution will cascade down from rich to poor, and that those displaced will just walk into another job that pays just as well.
Indeed, all the evidence so far is that the benefits of the coming change will be concentrated among a relatively small elite, thus exacerbating the current trend towards greater levels of inequality.
This was a point stressed by the Swiss bank UBS in a report launched in Davos. It notes that there will be a “polarisation of the labour force as low-skill jobs continue to be automated and this trend increasingly spreads to middle class jobs.”
A similar argument is made by Klaus Schwab, the man who runs Davos, in a book on the Fourth Industrial Revolution handed to each of the delegates at this year’s World Economic Forum.
Schwab compares Detroit in 1990 with Silicon Valley in 2014. In 1990 the three biggest companies in Detroit had a market capitalisation of $36bn (£25bn), revenues of $250bn and 1.2 million employees. In 2014, the three biggest companies in Silicon Valley had a considerably higher market capitalisation ($1.09tn) generated roughly the same revenues ($247bn) but with about 10 times fewer employees (137,000).
It is easier to make money today with fewer workers than it was a quarter of a century ago. Setting up and running a car company was an expensive business and required a lot of workers. A company that makes its money out of a smart app requires less capital, doesn’t have to pay for storage or transport in the way that car companies do and incurs virtually no extra costs as the number of users increases. In the jargon of economics, the marginal costs per unit of output tend towards zero and the returns to scale are high. This explains why tech entrepreneurs can get very rich very young.
Technological change has always been disruptive. There was a polarisation of income and wealth in the first wave of industrialisation at the beginning of the the 19th century, and this gave rise to political and institutional change over the 100 years between 1850 and 1950: the spread of democracy; the emergence of trade unions; progressive taxation and the development of social safety nets. These helped create bigger markets for the consumer goods that were spawned by the second Industrial Revolution: TVs, radios, vacuum cleaners and the like.
But over the past four decades a political model that both facilitated the spread of technology and provided some protection against its disruptive consequences has come under attack. Welfare states have become less generous, levels of long-term unemployment are much higher, taxation has become less progressive, politics has increasingly been dominated by those with the deepest pockets who can lobby the loudest.
Philip Jennings, general secretary of the global UNI union said: “We need some governance to ensure a democratic evolution and that requires public policy discussion. There is the opportunity to shape technology to improve people’s lives; through connectivity, education, health. We shouldn’t be fearful and fatalist about it.”
There is, though, a third and final myth: namely that all will be well provided the fruits of an economy dominated by artificial intelligence and smart robots can be redistributed, perhaps through a citizen’s income so that we can all have more leisure time when machines do all the work.
But redistribution, even assuming it happens, is only part of the story. Making his first visit to Davos, the Archbishop of Canterbury said the changes likely to be brought about required not just an economic but also a spiritual response. “This is not just about money, it is about what it is to be human”, said Justin Welby.
Schwab said: “The changes are so profound that, from the perspective of human history, there has never been a time of greater promise or potential peril. My concern, however, is that decision makers are too often caught in traditional, linear (and non-disruptive) thinking or too absorbed by immediate concerns to think strategically about the forces of disruption and innovation shaping our future.”
He’s right, although there is a simpler way of putting it: faced with the challenge of disruptive new technology, the current political framework is no longer fit for purpose and its shortcomings are likely to lead to a backlash that could turn very nasty. That should concern not just Schwab and the Archbishop of Canterbury but also the investment bankers of Wall Street and the tech billionaires of Silicon Valley.
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