Four tests for Osborne’s Budget


With the Coalition taking pre-Budget briefing to new levels you’d be excused for thinking there’s little we don’t know about tomorrow’s statement. But here are four questions we can’t yet answer, and that will be crucial to assessing whether this is a Budget for low-to-middle earners as the Chancellor claims:

1) Will the new increase in the personal allowance be restricted to basic rate taxpayers? When the Coalition raised the allowance by £1,000 back in April 2011 they cancelled out the benefits to those at the top by lowering the 40p tax threshold. The second time around — the £630 increase that kicks in this April — they didn’t. From the sound of things, Osborne is now set to announce a further large increase in the allowance for 2013 and possibly even beyond. So will he focus the benefits on basic rate taxpayers this time?

Both options carry their own particular poison. Limiting the benefits saves money and makes the policy more genuinely targeted at low — though not the lowest — earners. But it also means creating hundreds of thousands of new higher rate taxpayers. By contrast, not limiting the benefits means you’re spending huge amounts on a tax cut for some of the richest households in the country, including those earning up to £200,000. That’s not an easy argument to make when you’re taking Child Benefit away from households on £50,000, on the grounds that it’s now an unaffordable expense.

2) How far will Osborne go in cleaning up the Child Benefit mess? Back in October he announced the withdrawal of Child Benefit from households containing a higher rate taxpayer from January 2013. As has been widely discussed, for all its popular appeal this move creates an administrative nightmare. The best technical fix — paying CB through the tax credit system — will be deemed politically unpalatable, requiring millions more families to fill out complicated tax credit applications. Yet the current plan also seems untenable.

Right now, it looks likely Osborne will err on the side of simplicity and just raise the point at which Child Benefit is withdrawn, probably to around £50,000. That would save roughly 430,000 families from losing out compared to current plans. But he could also decide to withdraw CB more slowly as people’s wages rise, to avoid creating an ugly new cliff-edge in the tax system. This latter option would leave a less embarrassing mess for a Chancellor with aspirations to be a tax reformer. But it also costs a lot more. Either way, a U-turn on the Child Benefit policy opens up space on Question 1 above, breaking the link between the 40p tax threshold and the loss of CB.

3) Will there be any concessions on Working Tax Credit cuts? This one is definitely a long shot, but by telling Andrew Marr on Sunday that this will a ‘Budget for low and middle earners,’ the Chancellor has certainly not played down expectations. He’ll know well that his headline tax giveaway — the personal allowance policy — is far from the best way of targeting this group. And he’ll also know that £1.3 billion of new Working Tax Credit cuts are set to kick in this April, hitting low income working families between the eyes. Will he brazen out this mismatch? Or could there be a gesture to this group? One popular rabbit to draw from the hat would be an expansion of childcare, now a crippling expense for many working parents. Osborne has surprised us on this front before.

4) The big one: where will the money come from? Despite the austerity mantra, all the rumours —from the allowance to a partial U-turn on Child Benefit and 50p, not to mention possible growth measures — add up to a pretty penny. As ever, billions will no doubt be found from new crackdowns on tax avoidance (pity the poor Treasury official tasked with generating this number). And no doubt there is some substance to this, with the tax gap remaining colossal, even after falls in recent years. But it does seem likely the Chancellor will want at least one more concrete revenue raiser in the list. Most probable is a reduction in top rate Pension Tax Relief, with a decrease in the annual cap on contributions that qualify from £50,000 to £40,000. Could he also move in other areas? It wouldn’t be the first time he’s outplayed us at the expectations game.

Learning from Landes: The Unbound Prometheus

David Landes’ classic account of the Industrial Revolution, The Unbound Prometheus, is one of those books that makes you want to give up writing. It’s unimprovable.

From the start to the end, it’s fantastically generative—almost every page triggers a new idea, particularly in today’s context of anxiety about runaway technological progress.

For Landes, an ‘industrial revolution’ is “that complex of technological innovations which, by substituting machines for human skill and inanimate power for human and animal force, brings about a shift from handicraft to manufacture and, so doing, gives birth to a modern economy.”

This is the lowercase form of the phrase, applicable not just to the original Industrial Revolution—the one that took hold in late 18th century England, shifting the economy from agrarian handicraft to industrial machine manufacturing—but to any such process, wherever and whenever it takes place.

This abstract form of the noun immediately raises a challenge: what criteria should we use to identify an industrial revolution? If we use the term too loosely, we will end up finding industrial revolutions everywhere we look, and ultimately we’ll split the whole of history into a series of sequential revolutions, diluting the whole idea.

If we use the term too tightly, on the other hand, we’ll end up saying there’s only ever been one such event, the capitalised Industrial Revolution, and then we’ll have lost the analytical usefulness of the term.

This debate might seem pedantic but it’s resurfaced in the last few years with the publication of Brynjolfsson and McAfee’s book The Second Machine Age. Economic historians like Carlota Perez have argued that Brynjolfsson and McAfee are too tight in their approach, leading them into the mistaken view that the information revolution is only the second such event to have taken place in modern times.

As I’ve written before, I find Perez’s view persuasive. It seems to me that books like The Second Machine commit a kind of present-exceptionalism, the perennially alluring idea that we’re living through extraordinary times.

I call TSM’s particular version of present-exceptionalism the ‘sliced bread fallacy’, namely, the idea that some contemporary phenomenon is the most extraordinary such phenomenon of all-but-one such phenomena in human history.

Claims of this type are common. Just think how familiar it is to read a statement with the form ‘X is the most Y since Z’, in which Z is the most Y thing in history. The temptation in these statements lies, it seems to me, in that they combine present-exceptionalism with a certain false modesty; the writer avoids the childish enthusiasm of claiming something is the most extraordinary thing ever, but they do so by claiming it’s the second most extraordinary thing.

When it comes to historical analysis, falling prey to this temptation doesn’t just lead to untruth, it also leads to an unnecessary loss of insight because your historical sample is always one. Perez makes this point well in her analysis of Brynjolfsson and McAfee, when she argues that we’re living through the fourth or fifth technological revolution since the first such technological revolution, the rise of steam power in England around 1770. This might all seem like an academic distraction but it matters for this reason: the more accurately we can situate our current moment in economic history, the more successfully we will deal with the challenges it presents.

My own preference is to be more precise in our use of the term industrial revolution.

It seems to me that, properly defined, there has only ever been one true Industrial Revolution and there’s a good case for seeing this as the most consequential moment in human history—unique in the genuine sense that it started the dynamic of self-sustaining progress itself (more on this later).

The digital revolution clearly does not tick this box—it is simply the latest unfolding of the dynamic that was started when the Industrial Revolution took place.

Having said this, since 1770 there do seem to have been several developments that can safely be called technological revolutions. These do not compare to the original ignition of industrial capitalism but they are historic events in their own right. Properly defined, these moments are paradigm shifts, dramatic in their own right, each marking a qualitative break with what had come before, and each changing, eventually, pretty much everything—from the way we structure and organise human activity, to cultural norms and aesthetics, to the role and shape of the state.

This, for me, is a box the digital revolution does tick, just as steam, steel, and electricity ticked it before. The advent of digital technologies, and the information/data economy they enable, is, in these terms, the fourth technological revolution since 1770.

Why was the Industrial Revolution so special?

To clarify this distinction, it’s useful to look back to Landes’ account of the original Industrial Revolution, which underlines just why this moment was unique.

The Industrial Revolution took place, Landes argues, when three technological breakthroughs came together:

  1. Mechanical devices were invented that could replace human dexterity, massively simplifying the work required from human hands in the manufacturing process
  2. Steam power was harnessed to replace human and animal power in manufacturing, allowing factories to be bigger and faster and to run for longer
  3. New techniques were developed to obtain raw materials, particularly metals and chemicals, so that machines and the products they made were stronger and more durable

Individually, these breakthroughs did not change the world, but what did change the world, explosively and irreversibly, was the combination of the three breakthroughs in the petri dish of profit-maximising capitalism.

(It’s intriguing that Landes does not include the role culture played in enabling and even triggering the Industrial Revolution. Later, he recognises culture as a key explanation for why the Industrial Revolution took place when and where it did, although his argument on this is not as well-developed as later writers such as Mokyr.)

It is Landes’ vivid account of the interaction between these elements that makes him so pertinent today in the context of concerns about runaway technological progress. Re-reading him now, it’s hard not to shift around in your seat at the uncomfortable feeling that you’re watching the opening seconds of an unstoppable chemical reaction.

Let’s take a specific example: John Kay’s invention, in 1733, of the flying shuttle. Kay’s invention replaced the human dexterity required in weaving with a much simpler series of movements that was therefore dramatically faster. By speeding up weaving in this way, the flying shuttle increased demand for yarn—the weavers were weaving so damn fast that they kept running out. In 1764, James Hargreaves then invented the spinning jenny, allowing one worker to operate many yarn-spinning spools at once, dramatically speeding up the process. Richard Arkwright’s water frame then introduced a powered version of the same process, speeding up yarn-making even more. The weavers now had all the thread they needed and the overall system of fabric production jumped forward.

Examples like this give us glimpse into the glowing heart of the furnace just after it was lit. Productivity-enhancing inventions were prompting other productivity-enhancing inventions, feeding back in a continuous, self-amplifying loop.

And things didn’t stop here. Before long, the combined effect of these many technological breakthroughs burst beyond the bounds of technology to wider society. Landes notes, for example, how new techniques created pressure for new ways of arranging human activity that could better coordinate the industrial processes now being undertaken. This prompted shops and home workrooms to be replaced by larger mills and factories, organising human activity into bigger clusters that coordinated the efforts of more people, in part by delineating their individual roles more clearly—with all this newly co-ordinated activity aimed at the clear and simple goal of maximising profit, i.e. the different between these factories’ inputs and outputs.

This process created, in short order, many of the essential proteins of our modern economy. The employer was born, playing the role of hiring labour, marketing products, and supplying machinery. So was the modern worker, giving their labour in exchange for a wage. Other, more complex proteins, such as the company, were to follow.

These individual developments mattered. But what remained essential was, as Landes explains, not the quantitative progress they represented, but the qualitative shift that had taken place: economic growth had become self-reinforcing.

Thus, these changes fed back into, and further accelerated, technological progress itself. In Landes’ words, developments in organisational forms held within themselves “the seeds of further technological advance”. A more tightly defined manufacturing process, built around increasingly specialised jobs, lent itself even better to optimisation—and to the cumulative and compounding effects of that knowledge over time.

So, knowledge built upon knowledge, and technique upon technique, meaning that a breakthrough in one area made other breakthroughs possible. And, more than this, because the whole thing ticked to the rhythm of the machine—and a machine now powered by steam or water—a breakthrough in one part of the process did even more than this: it actually incentivised breakthroughs elsewhere, creating bottlenecks that needed to be solved—or, more precisely, that promised vast profits to the person who could solve them, drawing human effort and energy, and finance, to where it would add most value.

It’s in this account that you get the sense of a runaway reaction. And it seems to me that even this doesn’t go far enough. When you step back, you see how progress in the private economy then prompted progress of a similar kind in entirely different spheres of human life, from culture to aesthetics to the role and shape of the state. This is the road to later thinkers, from Polanyi to Galbraith, who lamented capitalism’s totalising effects.

As Landes tells it, however, there is beauty in this early part of the story. At every level you see the same dynamic of self-accelerating progress play out. A specific technological innovation trigger another innovation. The growing body of technical innovations then trigger new and more productive ways of organising human activity. These new forms of organisation then lead to wider innovations in government and culture. In Landes’ words: “In all of this diversity of technological improvement, the unity of the movement is apparent: change begat change.” Like a fractal, the system looks the same however much you zoom in or out.

This is what was so special about the Industrial Revolution: it started the cascading dynamic of progress that continues to this day. In doing so, it made possible—or even inevitable—the several subsequent technological revolutions: steel, electricity, and now the pervasive, paradigm-shifting effects of digital tech and ubiquitous information.

All of this prompts two counter-veiling thoughts.

One, it makes you feel that recent fears about runaway technological progress and AI are endearingly late to the party. Yes, we should worry about unstoppable technological change. But if the part we’re worried about is AI or technologies themselves, we’re mistaken a symptom for a cause. The unstoppable part of technological change isn’t the technology, it’s the self-sustaining change, and that started 250 years ago.

Two, more reassuringly, seen another way, the period we’re now living through is not actually all that special. It is not in the same category of the original, game-changing, Industrial Revolution, and more like the other chapters of the story that has unfolded since. And that means we can learn lots from reading previous chapters—by exploring how progress unfolded in previous technological revolutions, and how these moments themselves fed through from technology to technology, into organisational forms, and, ultimately, into the state.

 

Why America won from 1900 to 1950

In the first half of the 20th century, America raced ahead of the rest of the world, riding an unprecedented surge in productivity. Understanding why this happened is one of the most consequential tasks in economics.

The most famous answer to date came from Robert Solow in 1957, who claimed that 7/8ths of US productivity growth from 1909 to 1949 was growth in Total Factor Productivity, a concept typically taken to represent (in a very broad sense) technological change. This has led to the common understanding that technology, and smart ways of using technology, triggered the American century.

This working paper from Nicholas Crafts (2017) gives a more robust update to Solow’s work—and to the various other economists that followed Solow (particularly Kendrick (1961)). If you parse the economese, Craft’s answer is basically as follows:

From 1899 to 1941, America’s productivity (TFP) grew 1.3 percent a year on average—much lower than Kendrick’s 1961 estimate of 1.7 percent. The reason for the difference is that Crafts thinks labour productivity grew 0.8 percent a year in the period, not the 0.3 percent Kendrick estimated. This is mainly because Crafts takes into  account the improved education level of workers. In other words, an input to productivity improved quite significantly—in this case, the quality of America’s workers—and that meant there was less left over to be explained by the residual of TFP (which essentially reflects the effectiveness with which an economy turns productivity’s inputs into outputs).

The implication is that TFP does not explain 7/8ths of US productivity growth in the period, as Solow estimated, but around 60 percent. Technology wasn’t quite so overwhelmingly important to America’s surge; smarter workers were also key.

If the electric dynamo culminated in Fordism, where will the transistor lead?

Technological revolutions don’t start with an invention—they start with the deployment of an invention. This means it’s useful to understand how deployment plays out.

The last time the world was transformed by a new technology, the invention in question was the electric dynamo. The deployment of that invention came when Henry Ford realised that dynamos could be used to reconfigure, from the ground up, the way cars were made, and this entailed a basic rethink of how manufacturing worked.

Ford’s insight prompted the rapid deployment of electric dynamos, this time in truly transformative ways, across many sectors, unleashing a productivity boom. This rapid deployment helps to explain (although not solely) America’s 1920s bubble. There’s also a case for seeing it as an explanation for the much later, more sustainable boom of the 1950s and 1960s—the effects of Fordism continued to play out.

What’s interesting about the later stage of this story is the way the state had to reimagine itself in order to make possible sustained and stable growth. Carlota Perez describes the public policy denouement of this process as follows:

“Keynesianism and Bretton Woods were the transformative set of policies that created the new context to achieve both better business and better lives for all, through a sort of covenant between government, business and society, where all benefited.”

In other words, the short version of the story runs as follows:

The dynamo was invented; a few decades later Ford used dynamos to re-imagine manufacturing; the economy then lurched upward (and then downward) for a few decades; and, a few decades after that, the state re-imagined itself, ushering in a new era of stable and broadly-based economic growth. This is the period in which the American people and, to a lesser degree the people of Europe, thrived.

The longer version of this story is expertly-told by Paul A. David in this early version of his classic 1989 essay Computer and Dynamo. David’s article deserves to be read in full but, if you’re pressed for time, here’s a summary (albeit paraphrased, bastardised, and expanded in places):

  1. The electric dynamo was invented in a practical form sometime around 1850-1870. In the next few decades, dynamos became increasingly widespread in manufacturing but they weren’t used in a particularly revolutionary way—in the main, they simply replaced steam as a safer, cleaner, more efficient power source.
  2. Then, around 1908, Henry Ford took his plant at Highland Park Michigan and used it to rethink fundamentally how a factory could work in the electrical age. Ford took advantage of the flexibility of electric motors (a fascinating point, which Devine expands upon here). Specifically, Ford combined four non-revolutionary principles in a revolutionary way: he standardised car parts, mechanised their production, moved to specialised (Taylorised) roles for his workers, and stood his workers at an assembly line, so that parts moved past workers, rather than moving workers to parts. This made the Model T ten times cheaper than craft-built cars.
  3. The four principles of Fordism proved to be easily transferable to manufacturing in other sectors and, because the principles were also so economically effective, they spread quickly. This did nothing less than change how things were made and, from around 1910, this began to show up in productivity figures, drawing an end to the productivity slowdown of 1890-1910 with strong growth from 1910 onwards.
  4. These decades saw a rapidfire process of creative destruction which became the roaring 1920s. This did not, of course, end well, and the subsequent crisis made clear quite how fundamentally the economy had changed. Ultimately, it became clear that a new settlement in economic policy was needed. To give one example, Fordist principles prompted firms to spend a lot on specialised machinery so that they could produce large volumes of standardised products; that is, Fordism was capital-intensive and low marginal cost. This did funny things to demand in the economy, with widespread implications for financial- and consumer-capitalism.
  5. Fast forward to the end of WWII and new economic thinking had percolated. A range of new ideas, previously either unimagined or highly unorthodox, came together into a new view of how the state should operate in the Fordist economy. Keynes, Polanyi, Galbraith—a range of thinkers fed into this process to different extents. Ultimately, the new settlement changed all three aspects of the state’s work: how it steered the market (demand management, the pursuit of full employment), how it compensated for market outcomes (social security, the welfare state), and how it ran non-market services (Medicaid and the NHS).
  6. But the new settlement was not just about new policy content—it was also about the way the state did its work. In essence, it applied Ford’s organisational philosophy to government itself. The Fordist state thus took shape alongside the Fordist economy. It was built around a technocratic, hierarchical, and specialised civil service, and this civil service engaged in activities such as the active management of the labour market, prices, or demand, and the mass provision of standardised public services.
  7. This new policy settlement provided the final part of a powerful trinity—and it was this trinity that explained the incredible success of America (and, again, to a lesser extent Europe) in the 1950s and 1960s. The trinity was: (i) a mutually-supporting cluster of technologies (electricity, steel, etc); (ii) an organisational approach that was fully-calibrated to make the most of this particular cluster of technologies; and (iii) a state that had adapted to complement a private sector that was geared in this way. These are the three legs that made growth sustained, stable, and broad-based.

Nice story. So let’s admit, right away, that this account is impressionistic. It blurs a host of vital details and it exaggerates for simplicity and clarity. Plus, of course, there are more empirically-rooted, economically literate, and nuanced accounts available. Take, for example, the excellent work of Nicholas Crafts, of which a fine example here).

Even so, I do think storytelling helps—not least because it prompts one particularly useful question: What is the equivalent story for the ICT revolution?

We are now, after all, 50 years on from the advent of the personal computer—the moment Bill Gates and others worked out how to deploy the transistor, our own general purpose technology, equivalent to the electric dynamo. We’ve even clocked up experiences familiar to Ford’s contemporaries: financial crisis, productivity slowdown.

So how many legs of our technology trinity are in place?

I’d say one and a half. We certainly have a full set of mutually complementary technologies, built around the transistor. And I’d argue we’re halfway toward a rethink in the way companies, at least at the vanguard of the economy, are calibrated, so as to take advantage of these technologies (think agile working, UX, multidisciplinary teams, autonomy, etc).  Where we fall down, I would argue, is with the state. We have a Fordist state in a Gatesian world. Little wonder things feel so unstable.

 

We’re at a turning point

This from Carlota Perez is exciting – or terrifying – or both:

“[W]e are yet to emerge from the turning point of the ICT revolution, and the space for shaping the future is much wider than it seems. To give a sense of the range of the viable, we can again look back at the 1930s, the turning point of the last surge. The shaping of the potential of mass production manifested in very different ways under Nazi-Fascism, Sino-Soviet socialism and Keynesian democracies, and with great variations in each – as between Mussolini and Hitler; Russia and China, Sweden and the USA. The present moment, according to the more segmented pattern of history that I have observed, is when institutional innovation is called upon to shape and direct the new technologies.”

So we are now at a turning point “the equivalent of the 1930s, the 1890s and 1840s”. We can choose which way to go – and one of the options is grim.

This is from the third installment of Perez’s excellent series of blogs discussing Erik Brynjolfsson and Andrew McAfee’s The Second Machine Age.

Why the twenties roared

In the 1920s, after a slowdown in productivity growth from roughly 1890 to 1910, the US suddenly experienced another productivity boom. Why did this happen?

This article, from Paul A. David and Gavin Wright, proposes an answer. The US productivity boom of the 1920s was, they say:

“…a phase in the diffusion of a general purpose technology (GPT) that made possible significant fixed-capital savings while simultaneously increasing labor productivity as well.”

The technology they’re referring to is the electric dynamo, which started to see widespread use in manufacturing around this time.

But, David and Wright go on to say, the technology itself wasn’t enough.

“[A] purely technological explanation of the productivity surge is inadequate. It would neglect the concurrence of these developments with important structural changes in US labor markets, and the interrelationships that appear between managerial and organizational innovations and the new dynamo-based factory technology, on the one hand, and between both forms of innovation and the macroeconomic conditions of the 1920s on the other hand.”

In other words, it wasn’t the electric dynamo itself that boosted productivity, it was Ford’s application of the electric dynamo—the way The Ford Motor Company, starting at its Highlands Park factory in Michigan, used electric motors to rethink how factories worked, building their new plant around the concept of the assembly line.

Here’s the chart on US total factor productivity in manufacturing that underlines this point. The electric dynamo had been around for years but it wasn’t until at least 1910 that its effects on productivity started to show. To paraphrase Robert Solow, the electric dynamo was, until this point, “visible everywhere except the productivity statistics”.

Screen Shot 2018-02-13 at 08.09.11

The lesson to draw? One, we should all just calm down—a decade or two of slow productivity growth is common in the course of a technological revolution, so an uptick could well be on its way. Two, that uptick will only come when we answer the following question: what is our equivalent of Fordism? How can organisations in 2018—companies, government departments, charities—fundamentally reimagine themselves around the modern day equivalent of the electric dynamo: the transistor.

 

 

 

A hopeful economics – and how to unleash a golden age

If you think about economic history as a series of technological revolutions, in which scientific breakthroughs are made and then diffuse, slowly, into our economy, setting off (eventually) a surge in productivity, this gives you hope for our economic future.

Carlota Perez points out that high inequality is a feature of the early stage of technological revolutions. “Both in the installation period of the mass production revolution – in the 1910s and 1920s – and in that of the current ICT one – from the 1980s to the 2000s – the income share of the top 1% of taxpayers tends to reach 25%.”

That’s good to hear because it suggests that, with the right settlement in social and economic policy (although note: in the past, this has meant radical change), we can now rise the next stage in our current technological revolution to a new golden age, a sustained period of falling inequality and broadly shared growth in living standards.

post4f1

Chart from Perez is here.

Here’s the crux: this eventual golden age doesn’t unleash itself. We have to unleash it.

A crucial factor in the eventual uptick in productivity and broad-based growth is a change in the technological paradigm. The uptick comes when we abandon our loyalty to modes of production associated with the previous technological revolution. In our current case, case, then, the uptick will come when we free ourselves from Fordist modes of mass-production and hierarchical, bureaucratic organisation – approaches that were designed to work for the electricity revolution and not the digital revolution.

In other words, we need to mainstream digital-native ways of working: iterative/agile project management, less hierarchy, a try/fail culture, structuring organisations and work around tribes and multidisciplinary teams, a relentless focus on UX, design as function rather than aesthetics. Only then will we see the digital revolution appear in the productivity statistics.

Kuhnian paradigms and Excel

Technological paradigms: an idea developed by Dosi (1982) and others to describe the way innovation become path dependent and change incremental – i.e. once a technological paradigm takes hold, change takes place only within that outlook and its associated procedures and problem-definitions. This is in keeping with Kuhn’s scientific paradigms and the notion that transitions between paradigms—the downfall of phlogiston, the rise of Copernicus—are revolutionary in the true sense of the word.

The idea of tech paradigms has fallen out of fashion in recent works of economic history. But it still feels helpful to describe the way technological breakthroughs take a long time to change how we think. Technology changes and then, 20, 30, 50 years later, we realise we need to change. Think how long we stuck (and are still sticking) to these old-fashioned ways of thinking:

  • IT project management – which, in the early decades of the ICT revolution, we first approached in the same hierarchical way we’d approached project management under Fordist mass-production. Now, this approach is giving way to agile and iterative working in multidisciplinary teams, and this is starting to unleash ICT’s transformative potential. Even now, though, major project like Britain’s Universal Credit reform, were started with an outlook more suited to the previous paradigm.
  • Data analysis – think how, in the 1980s and 1990s, we digitised data analysis by simply shifting our paper ledgers onto a computer screen – think how similar Excel looks to a paper ledger. Now that the ICT revolution is maturing, data storage and analysis is becoming unstructured, and data lakes combined with machine learning and neural networks, are opening up previously unimagined possibilities.
  • Sharing/peer-to-peer – and think how, even now, whole industries are trying to resist this entirely inevitable transition: London’s black cabs trying to resist it with regulation to protect their monopoly, the hotel industry trying to resist Airbnb in various ways. Both doomed, and both probably knowing it, but both nonetheless unable to transition into the new way of thinking.

Moments like these capture both the deeply disruptive nature of the new technology and the sticky nature of the previous technology. As Carlota Perez says:

The irony is that, when the innovation potential of the prevailing revolution has been exhausted, and its markets saturated, it is the original success in implementing that paradigm which ends up becoming an inertial force that delays the diffusion of the next revolution and the reaping of its full benefits.”

Spot on—that’s exactly why companies find it so hard to adapt. Because the systems, processes, and qualities that made them successful in the old paradigm are precisely the systems, processes, and qualities that will make them fail in the new one.

Is this a Habitat or a post-Habitat world?

There’s a lovely nostalgia to Robin Murray’s classic article: Life After Henry (Ford).

Here’s how he opens, describing, from the vantage point of 1988, the UK’s move away from Fordist mass-production to an economy driven by services:

“During the first two centuries of the industrial revolution the focus of employment shifted from the farm to the factory. It is now shifting once more, from the factory to the office and the shop. A third of Britain’s paid labour force now work in offices. A third of the value of national output is in the distribution sector. Meanwhile 2.5m jobs have been lost in British manufacturing since 1960. If the Ford plants at Halewood and Dagenham represented late industrialism, Centrepoint and Habitat are the symbols of a new age.”

Murray goes on to explain how the Fordist paradigm took hold in the first place:

“Ford’s Model T sold for less than a tenth of the price of a craft-built car in the US in 1916, and he took 50% of the market.”

It was that 10X improvement that made Ford’s approach so disruptive. So how did the company do it? By combining four principles of production:

  • Standardise as many parts as possible
  • Mechanise production
  • Taylorise labour by splitting out specialised tasks
  • Run factories with assembly lines – move parts past people, not people to parts

None of these ideas was new. But, combined together, they were. Together, when run at scale, they led to a 10-fold reduction in cost, and that triggered an entirely new era. 

That trigger was pressed, though, not by cheap cars per se, but by cheap everything else. Ford’s four principles diffused into other sectors and it was this transferability that made Fordism revolutionary.

This is also what makes ‘paradigm’ the right word for Fordism, because it entailed not just a new mode of production but a new way of life: it changed everything.

So, for example, Fordism was highly capital-intensive, requiring significant investment in new plants and custom machinery, and that had major implications for finance,  accounting, and company structures. As a flipside, the new model was low marginal cost, meaning it incentivised a consumer economy run on large volumes of highly standardised products. This, in turn, entailed the boom in branding and the need to drive consumer demand through advertising. Thus Fordism begat Madison Avenue.

Workplace relations followed too. Workers had lost the individualism they’d had as craftsmen. Now working, in large numbers, as part of the production process, they had been standardised too. And that helped unions form, recruit, and push for higher wages on the basis of workers’ productivity. And, although those unions defined themselves in opposition to employers, their approach was Ford’s approach: hierarchical, standardised, bureaucratic, divided into distinct departments, and male. (Words that, for the most part—though not everywhere—still describe unions today.)

So the technological breakthroughs that enabled Fordism grew into a technological paradigm. And that takes you to a key question:

Are we now, in 2018, entering a new paradigm, to replace the post-Fordism of Murray’s Centrepoint and Habitat? Or are we merely entering a more refined and accentuated of that post-Fordist world?

Here’s the case for the former: lots of the characteristics Murray describes as post-Fordist are still familiar in 2018. For example, Murray notes:

  • How “retailers had been using computers to transform the distribution system…. With computerised control of stocks in the shop, transport networks, automatic loading and unloading, Sainsbury’s flow-line ‘make to order’ system has conquered the Fordist problem of stocks.” Not all that different to Amazon.
  • How companies had begun to “overcome the limits of the mass product. For, in contrast to the discount stores which are confined to a few, fast-selling items, Sainsbury’s, like the new wave of high street shops, can handle ranges of products geared to segments of the market. […]  The point of this new anthropology of consumption is to target both product and shops to particular segments.” He also notes that “a centrepiece of this new retailing is design.” Again, familiar to today’s discussion of personalised products.
  • That new approaches, like Toyota’s, had “adopted quite different methods of labour control and organisation. Toyota saw that traditional Taylorism did not work.” This entails “parallel changes in corporate organisation. […] Greater central control has allowed the decentralisation of work. Day-to-day autonomy has been given to work groups and plant managers. Teams linking departments horizontally have replaced the rigid verticality of Fordist bureaucracies.” Autonomy is a feature today too.

Overall, then, all these comments feel at most quantitatively different from where we are today, from Amazon’s capabilities in retail to the way technology has allowed an increasing personalisation of products and a decentralisation of firms (Uber, etc.).

The case against, I suppose, lies in the aspects of today’s economy that do feel qualitatively different to the post-Fordist Habitat world. For example:

  • The way today’s mode of production, such as those applied by SpaceX or by disruptors like Monzo, are leading to another 10X reduction in costs, over and above the 10X reduction that was achieved by the Fordist assembly line.
  • The way today’s companies have entirely different cost models that come close to zero marginal cost, particularly in the software side of the technology sector.
  • The way entirely new dynamics, particularly the network effects of the social economy, are now playing out in ways that were not imagined when Murray was writing in 1988.

This might all seems like semantics but it’s a question of importance. It tells us whether we’re in the post-Fordist, Habitat-world, or the post-post-Fordist, post-Habitat world. And that tells us whether we need simply to evolve the political, social, and policy approaches of the last 30 years, or else develop radically new ones.

QWERTY worlds and economic strangeness

Paul A. David’s classic article answers the following question:

“Why does the topmost row of letters on your personal computer keyboard spell out QWERTYUIOP, rather than something else?”

Despite evidence that the more efficient DSK keyboard layout is 20-40% faster.

Screenshot 2018-02-15 at 17.46.04
The Dvorak Simplified Keyboard. Patented in 1936 by August Dvorak and William Dealey.

Yes, the answer starts with a historical accident: early typewriters jammed when people typed too fast, so the QWERTY layout was developed to slow typing down.

The key, though, is that three factors then locked in this equilibrium:

  1. Technical interrelatedness – the hardware and the software depended on each other, so once the hardware was built around QWERTY, so was the software, and this interdependence became really hard to get out of.
  2. Scale economies – once QWERTY became more popular it was cheaper for the decision-makers in companies, in each individual decision they made, just to stick with it.
  3. Irreversibilities due to learning and habituation – it was just plain damn annoying to have to learn to type a different way.

But here’s the really interesting point:

The QWERTY story is almost certainly not an anomaly – it more likely to be a sign that, over and again, in ways both invisible and visible, our economic world is determined by this same combination of (1) historical accident and then (2) factors that lock in that accident. That sprinkles strangeness all over our economic world and it complicates, potentially quite significantly, the task of modelling/explaining the world we see.

Here’s David to end in much more eloquent terms:

“I believe there are many more QWERTY worlds lying out there in the past, on the
very edges of the modern economic analyst’s tidy universe; worlds we do not yet fully
perceive or understand, but whose influence, like that of dark stars, extends nonetheless to shape the visible orbits of our contemporary economic affairs.”