La Partita Imaginaria

The Third Industrial Revolution - a response to the Economist

KRISPY KRISIS

Some insights as to why growth (for really quite some time) is over, strikes can’t work and more generally, the crisis of the labour-capital relation.

Essay from Endnotes 2 - http://endnotes.org.uk/articles/1

Essay from Endnotes 2 - http://endnotes.org.uk/articles/3

Essay from Riff Raff -  http://bit.ly/IdM1kH

Essay from Riff Raff -  http://bit.ly/IdMeV9

Essay from Riff Raff -  http://bit.ly/IdMuDj

The Crisis of Value in the Network Society - the biggest crisis of them all?

‘The word ‘crisis’ seems a commonplace at present. It is a word whose ceremonial invocation by commentators and holders of public office alike is made with an almost merry abandon that borders on monotony. This should come as little surprise given the numerous crises of the present can appear both rather dull and at times slow in playing themselves out. They are however most certainly there. Indeed no less a publication than the Financial Times recently ran a week of topical comment under the appellation ‘Capitalism in Crisis’. The same publication also chose to interview Robin Blackburn and Jason Barker as to whether ‘Marx could Save Capitalism?’ with such an intervention being undertaken perhaps on the understanding that even Keynes is no longer sufficient for our current predicament.

While the word crisis is most frequently deployed with reference to the eponymous global financial crisis (GFC) that began in 2008, one observes an emergent polyphony of crises that are diverse in cause and global in scope. This polyphony includes the student debt crisis of the United States, the Eurozone public debt crisis,  further private debt crises (in the shape primarily of credit card and increasingly payday loan debt) in North America and Europe, the demographic crises of Europe, Japan and Russia, increased global demand and resource scarcity that will eventually lead to ‘peak everything’ and the high possibility of a second US foreclosure crisis. This is not to mention an abundance of others.

My intention here however is to examine a crisis, which, unlike those listed above seemingly resides beneath the collective attentions of politicians, commentators and most citizens. This crisis is the impact of some of those phenomenon associated with the ‘Network Society’; distributed networks, open-source, modular and peer-to-peer modes of production and ever-increasing mechanisation of labour, and the impact(s) of all of this on jobs, wages, growth and profits.

While policy-makers  proclaim the ‘Digital Economy’ will catalyse jobs and growth and offers a bright light amid the darkness, my contention is that the ‘digital economy’ in its current form and as it is increasingly extended to new spheres of production, will instead exercise a deflationary effect  as well as leading to massively increased levels of unemployment and underemployment, stagnant wages and even diminishing rates of profit for capital.

The ‘Digital Economy’ Will Destroy and Not Create Jobs

The view that new technologies create jobs is fundamentally misguided  - indeed they nearly always do the complete opposite.

Marx claimed that as accumulation proceeds increased abundance lowers the rate of profit and heightens competition across lines. As a result capital seeks to economise on labour. This desire for constantly gaining a comparative competitive advantage means minimising the cost of labour as an input and the persistent lowering of wages and engaging in redundancies wherever possible.

As a response classical political economy, and later Schumpeter, claimed that people that lost their job as a consequence of this process move into newly developing industries - this supposedly illustrative of the creative destruction of capitalism itself. In response Marx claimed to have identified through the business cycle a shift from labour intensive to capital intensive industries with a resulting fall in the demand for new labour as technological innovation progresses and new industries develop. To back up such claims Marx pointed to the British census of 1861 showing that the new industries of the ‘Second Industrial Revolution’ were in employment terms comparatively smaller then the antecedent ‘First Industrial Revolution’. Marx gives the examples of ‘gas works, telegraphy, photography, steam navigation and railways’ for the latter, all of which were highly mechanised and relatively automated processes.

Assessing these industries Marx claimed that they employed no more than 100,000 workers - this comparing to over one million in the industries of the First Industrial Revolution centred around metallurgy and textile manufacture whose workforces were by then rapidly shrinking as a consequence of greater mechanisation. Subsequently the industries of the Second Industrial Revolution had not absorbed anything like as much labour as the First Industrial Revolution had expelled and Marx’s expectation of the secular trajectory in the decline in the demand for labour was born out by empirical evidence. Here one sees empirically mapped for the first time how mechanisation destroys jobs

Marx claimed that amid the periodic crises,  a crisis of the capital-labour relation would itself emerge with workers and capital being increasingly unable to reinsert themselves into the production process. Marx believed this to be an inherent component of the system born of technological change over time and its continuing tendency to minimise, automate and mechanise what had previously been human labour.

It is frequently stated that this prediction of rising unemployment is contradicted by the observable history of capitalism subsequent to Marx’s death. Yet quite apart from the fact that these tendencies are often over-generalised, their evident reversal since the early 1970’s has made Marx’s notion of the secular crisis appear increasingly compelling. Indeed the last three decades have witnessed a global stagnation in the number of total workers involved in industrial production despite the ‘Great Doubling’ and a 600% increase in global GDP during the same period.

What Marx did not foresee, and what occurred in the 1890s, was the emergence of new industries that were simultaneously labour and capital absorbent, and which were able to put off the ‘secular’ decline for more than half a century, ultimately until the late 1960’s. The growth of these new industries, principally cars and consumer durables, depended on the major economic development of the 20th century, the increased role of the state; in monetary policy, in providing infrastructure such as roads and electricity networks and eventually by heavily mediating both supply and demand. It was all of his this this which facilitated a golden age of capitalism within which Marx’s prognostications appeared incorrect.

Yet, as the unprecedented state deficit-spending which supported this process indicates (a process which hitherto had only happened in wartime) there is no inherent tendency within capital that allows for the continual generation of product innovations to balance out its labour-saving process innovations.

When the car and consumer durables industries began to throw off capital and labour in the 1960s and 70s, the next wave of innovation in microelectronics, IT and eventually the ‘digital economy’ were and remain unable to absorb the new surplus of labour, even decades later. This was a repeat of what Marx saw in the 1860s. Unemployment in 1960’s Britain averaged 1.6% from 1950-69 whereas between 1920-38 it had averaged 13.4%. A return to the first figure is impossible within the present paradigm, a return to the second appears inevitable (indeed by some measures it has already surpassed it).

Over the last 40 years average GDP has grown more and more slowly on a cycle-by-cycle basis in both North America and Europe, with only one exception in the US in the late 1990s. Meanwhile real wages have stagnated, and workers have increasingly relied on credit to maintain standards of living. As a consequence household debt in most of the OECD countries has ballooned during the period with this being most insidious in post-industrial economies such as the US, UK, Ireland and Spain.

It is frequently stated that this deindustrialisation of high-GDP countries such as the UK and the US can be blamed on the industrialisation of the low-GDP countries. This is not the case however. After 1973 export markets for manufactures becoming saturated and it was increasingly the case that a few countries were capable of providing manufactured goods for the entire global market. The resulting crisis of the capital-labour relation, signalled a fall in the rate of profit and led increased unemployment and precarity world-wide, from Harlem to Colombo to Hackney. As the capital-labour accord snapped wages simaltaneously stagnated. While capital in all countries became even more dependent on international trade, from now on, capitals in some countries could only expand at the expense of others as global trade had become a zero-sum game. Though they had not yet caught up to the high-GDP countries, the developing world took part in this same process deindustrialisation under the guise of SAPs.

A common objection to this is to point to China as an obvious exception to this picture of global stagnation. In recent decades China has become a global industrial powerhouse, but it did so not through opening new markets or innovating new productive techniques but rather by massively building out its manufacturing capacity at the expense of other countries. Global trade is now almost a zero-sum game.

Importantly however, while one assumes that this expansion must have brought about a historic increase in the size of Chinese industrial employment, this is observably not the case. Indeed China did not create any new jobs in manufacturing between 1993 and 2006, with the total number of workers hovering constantly at around 110 million. The degeneration of the old North-East being co-terminous with the rapid industrialization of the South.

The overwhelming trend, the mechanisation of labour, means that even the high value companies of the ‘Digital Economy’ employ very few people. One example is Instagram which when bought by Facebook last week for around $1 billion was found to retain a full-time staff of 13 people. Furthermore this mechanisation and move away from labour intensity means that even higher-value actors at the forefront of the Digital Economy such as Yahoo will make large-scale redundancies even when running profits.

To conclude, being a ‘hi-tech’ or ‘digital’ economy, as alluring as that may sound, is no panacea. These are after all industries with very low levels of labour-intensity, this essentially is what defines them after all. The idea that they could lead to increased employment, even when successful in generating profits for shareholders, is absurd.

The Network Society is Deflationary

While new technologies and innovations create new utility value, that doesn’t always mean they generate increased profits. Indeed many technological changes and their integration into the economy can in fact have a deflationary effect. If one looks at the period 1870-1890 ‘The Great Deflation’ was correlative with the rise of the Second Industrial Revolution of which Marx observed and wrote. To a great extent the latter catalysed the former with inexpensive Bessemer and open hearth steel, the railroad boom, efficient steam shipping and animal powered agricultural mechanization permitting dramatic increases in productivity and leading to continuous deflation in the wider economy. It is quite possible that we are at the beginning of a similar period at present although deflationary pressures may well be offset by rising energy, food and commodity prices given the scale of the coming resource crisis, time will tell.

Even now, at the very genesis of the paradigm it is estimated that open source annually destroys $60 billion in net revenues for the proprietary software sector. The impact of information abundance means that those goods and services previously based upon information scarcity and its high costs of reproduction such as journalism, films and music are severely challenged in finding viable methods of generating revenues. Vertically integrated firms, retail stores, administrative organisations and even universities are in part adaptations to a communications ecology in which information is costly and assymetric and such conditions are no longer the case.

While many are concerned about how such industries can survive it is clear that the ‘Napster moment’ is in fact for the vast majority of industries only just beginning to arrive. As with software we may see open-source allied with modular forms of production destroying proprietary value rather than replacing it in other parts of the economy and it is clear that the same trends are being extended into offline production and manufacturing.

      Modular, easily replicable, open Source and peer-to-peer manufacture based around the morphology of the distributed network and solid freeform fabrication may destroy the existing manufacturing paradigm permitting the production of goods to be done at a local basis and undertaken with regards to the needs of a specific community. This kind of production is already evident with the Open Source Ecology project and could be extended to many other areas from car manufacture to furniture and clothing with non-automated human labour instead focusing on highly intricate detail.

If the impact of Wikipedia, Linux and the online P2P economy has had a net deflationary effect (thats before we even touch upon piracy which in all honesty can not be ‘beaten’), then just like the ‘Great Deflation’ at the end of the 19th century, we should understand that the deflation evident in these sectors is only the beginning once the same norms of distributed production are extended to offline goods and services. The ruins of the software and music industries are merely the leading edge of a hurricane .

The Network Society Destroys Profits

Much economic growth during the post-war period within the OECD,  ‘golden age’, was generated on the supply-side of the economy by technological catch-up. This meant that the countries of the ‘West’ were able to bring into production a large backlog of unexploited technology the principal part of this backlog consisting in methods of production and of commercial and industrial organisation already in use in the United States.This was most evidently the case for Italy, France and Japan in the ‘golden age’ and has also been the case for much of the developing world, particularly the BRICS (except Russia) in more recent years.

The opportunities for technological catch-up gave capital a high marginal productivity, leading to high levels of private-investment demand in the period. This was most notable in countries such as Italy and Japan - two of the countries with the world’s highest recorded economic growth between 1950-73. Recently, however, it seems that private investment in fixed capital assets is increasingly undermining profits instead of catalysing them. The major reason for this was what Marx called ‘moral depreciation’. As he wrote,

“…in addition to the material wear and tear, a machine also undergoes what we might call a moral depreciation. It loses exchange-value, either because machines of the same sort are being produced more cheaply than it was or because better machines are entering into competition with it.”

Between 1990 and 2009 the costs of moral depreciation averaged 27% of after-tax profits in the US, up from less than 5% in 1961 and 10% in the mid-1970’s. This means that increasingly large shares of surplus value have not been realised as profit because of losses stemming from moral depreciation in the last three decades. This appears to be an increasing trend that does not seem to be stopping anytime soon.

While many see IT-based consumer products  as a catalyst for growth (as well as jobs) that permits yet another phase of expansion it seems that the IT ‘revolution’, powered as it is by Moore’s Law in increases in processing power, Gilder’s Law in bandwidth and Metcalfe’s Law in the value of network increases, brings heralds a massively increased velocity i the pace of obsolescence that increasingly contributes to the destruction of value and subsequently rates of profits. This is confirmed in a paper published in 2003 by Tevlin and Whelan which empirically observed that such change is constantly depreciating the value of existing fixed assets through the speed of technical innovation.

Conclusion: Life After Work

‘Get a job’ is the insult most self-gratifyingly deployed by many who castigate protestors, regardless of whether the recipients of such an ‘insult’ are in employment or not. This is imitated in large part by a politics of ‘job creation’ that is accepted by all the major parties. Be it the expansionary fiscal austerity of the government or the Keynesian critique of those such as Paul Krugman, both implore that it is their own logic which will prove best at ‘creating jobs’. As this essay hopes to have have illuminated in small part, such a politics is completely at odds with the changes we have observed in the global economy during the course of the last several decades and that continues apace. These are;

i) The continually increasing mechanisation of labour and the impact that this has on increases in unemployment, labour precarity, declining wages, growth and  profits. This leads to an increasingly large part of the population and indeed surplus capital (FTSE 100 companies are currently sitting on around £650 billion of equity) incapable of re-inserting themselves back within the production process. This has been described elsewhere as the crisis of the capital-labour relation.

    ii) With the rise of peer-production and distributed networks both offline and online, we see a new kind of non-state, non-market production that represents an increasingly larger sphere of all production. This may exercise a deflationary effect as the costs of many goods and services are brought down through certain form of disintermediated exchange. This could well lead to a massive increase in utility value but not correlatively in exchange value. Subsequently we may see a deflationary period in manufacturing and production akin to that seen between 1870-1890 and the first ‘Great Deflation’.

    iii) The major technological trends of the Network Society inspired as they are by the ‘3 Laws’ as listed above seem to increase the rate of moral depreciation of fixed capital. Subsequently increasing amounts of surplus value are lost in ‘upgrading’ fixed capital to remain competitive rather than being translated into profit.

Amid all this full-employment utopias look rather limited to say the least. They are impossible within the present system and not needed were such a system be altered to meet existing social needs.