The world my children inhabit looks superficially like the world I grew up in during the 1970s. The house they live in, the clothes they wear and the food they eat – none of these would be very strange to the kids of a generation ago (although even here there are notable differences.) But the way they spend their time is completely different to anything I dreamed of doing.
When I grew up there were no computers, no smartphones, no video games. There was no Facebook, no Google, no YouTube. I spent my time playing outdoors in the “real world” or in a make-believe world of my own invention, or playing with board games or toys.
My children live in a digital and virtual space. The world has been transformed in a generation, and not just for children. We have entered a new economic era.
Five economic eras
- The first economic era was the hunter-gatherer phase. This lasted for millions of years, and throughout this time, economic activity consisted of individuals and family groups collecting and consuming their own food and other essentials.
- Then, around 10,000 years ago, the agricultural age began. By raising crops and tending animals, it became possible to create a surplus of food. This could be traded with other groups for different types of food, or for other goods such as tools or clothing. Job specialization became possible for the first time, leading to a steady growth in technological development and prosperity.
- At some point one of the world’s greatest inventions was introduced – money. As soon as goods and services could be bought and sold instead of just traded, technological growth accelerated rapidly, and with it came increased job specialization and sophistication, although the overwhelming majority of people still worked on the land.
- The industrial age brought a further acceleration in economic growth, and a massive population shift from the countryside to the cities. Machines increased productivity by orders of magnitude, enabling people to take up a plethora of new jobs, and to enjoy new levels of affluence. The key resources of this age were capital, and physical resources such as coal, oil and metals. I believe that this era has now largely ended.
- I will call the next era the virtual age. While we still require just as much food, clothing and material goods as before, we are increasingly demanding virtual goods and services too. Computers and smartphones are machines, but their true value is as gateways to digital products and systems. More and more of us spend our time creating, using or selling digital products. If you work in accounts, or marketing, or teaching, or programming, the value you are creating is abstract and rooted in ideas, not physical objects. The economies that will progress most rapidly and create the most wealth for their citizens during this next phase will be those that create and deliver virtual products. And needless to say, knowledge and human creativity will be the key resources.
How wealth has changed
It’s interesting to note what wealth looked like in the different economic eras. In the hunter-gatherer age, wealth was what you knew, and what you could carry with you. In the first farming era, wealth was the land you tended, the animals and crops you had available, and the knowledge to transform them into food. With the invention of money, wealth was the gold and silver in your pocket, the things you could sell for money, and the things you could buy with it. In the industrial age, wealth was what you owned, and the wages or profits you earned in exchange for your labours and skills.
So what will wealth look like in the new era? Many of the new digital goods and services are free. Google, YouTube and Facebook cost nothing. Neither do most online news, entertainment and information websites. Subscription services like Netflix are cheap compared with the physical devices we use to access them. And the cost of computing power is falling exponentially. Even the cost of traditional physical goods is falling. Food is cheaper than ever before in relative terms – in 1900, Americans spent 40% of their income on food, and now it’s just 15%. The number of people who own cars has increased enormously since the so-called golden era of the 1950s. And we all own incredible new devices that didn’t even exist a generation ago.
Material goods are becoming cheaper and more abundant than ever before, and more and more of what we consume is actually free. So the concept of wealth is being turned upside down in the virtual age, and wealth itself is becoming virtual. Will money be needed in the future? Perhaps not. Traditional measures of inflation simply don’t reflect this transformation, and can be deceptive. In the future, we will consume more than ever before, but it will be much cheaper. Perhaps it will be free, or so cheap that we won’t need to worry about it.
The number of people working in factories and making physical goods will continue to fall, as robots and automation increases productivity. The same thing happened in the move from the farming age to the industrial era. In the mid-nineteenth century, most workers were engaged in agriculture, but by the middle of the twentieth century, the number had fallen to around 20%. Today it is around 1%. Manufacturing, mining and other heavy industries are following the same downward trajectories, as more and more people work in the virtual economy.
Many commentators are worried about technological unemployment. Yet in the UK the employment rate is at an historic high. In the US, it is higher than at any time during the 1950s, 1960s or 1970s. There are arguments for technological unemployment, but there are arguments against. So far the evidence is mixed.
Perhaps employment will become optional, as less money is needed in order to live.
Inequality and poverty
Many people are convinced that the decline in manufacturing and traditional work is leading to poverty and inequality. Populist politicians across the United States and Europe exploit this concern, promising to return us to a mythical golden age of manufacturing and heavy industry. Yet employment levels and affluence are at an all-time high.
Average families have more disposable income than ever before. Life expectancy is at a record high and trending upwards, and people are enjoying longer, healthier retirements. In the developing world, the story is even better, with disease, poverty and infant mortality all trending down rapidly, and living standards moving closer to those in the developed world.
Poverty is in decline. What about inequality?
In the hunter-gatherer era, everyone was equal. But if you were old, or ill, or disabled, you would be dependent on the goodwill of others for your survival. In times of drought or flooding, everyone starved equally.
In the period of farming, land ownership was the key to wealth, and a tiny number of people controlled virtually all of it.
In the industrial period, control of capital and resources was the route to wealth. Most people didn’t have access to these. However, unlike land, which was fixed and finite, capital was fluid and expanding, and a huge amount of “new money” was created. A middle class was born.
Now, in the virtual economy, the critical resources are knowledge and creativity. These are potentially unlimited resources, and wealth will be created at an unprecedented rate. Who will create that wealth? It could be anyone. Inequality may soar this century as some individuals create vast virtual empires, or it may disappear as the cost of living tends towards zero and money becomes irrelevant. Either way, we will all be unimaginably wealthier as a result.